As a socialist I am in a peculiar position introducing legislation on the Stock Exchange.
Since I mentioned the long interval since the existing stock exchange legislation was passed, I take this opportunity to pay tribute to the various stock exchanges and their member firms which have operated in Ireland, and most particularly to the Dublin Stock Exchange which has survived through the decades, now known as the Irish Stock Exchange. It is no secret that the Minister for Finance, Deputy Ahern, has not always seen eye to eye with the exchange, but its long record of achievement must, nevertheless, be acknowledged. The Stock Exchange has generated capital for industry and helped to meet the funding requirements of Governments down through the years. The Stock Exchange and its members could not have survived through nearly two centuries without a considerable capacity to adapt to changing circumstances while meeting the fundamental requirement of maintaining investor confidence in their operations.
Nevertheless, the passage of time since 1799, especially in the area of financial markets, means that an entirely new regulatory environment is now necessary for the Stock Exchange and member firms. The 1799 Act is no longer adequate for modern conditions. The scale and complexity of events in 1799 bears no comparison to those of 1994. To take one example, when the Act of Union came into effect in 1801, the funded public debt of Ireland stood at just less than £27 million; it is a little higher than that today.
In the last decade, in particular, the whole financial services sector has been subject to revolutionary change. Deregulation, the removal of exchange controls and rapid technological advance have been to the forefront in this revolution. Technology in particular has had a dramatic impact on the sector and it has facilitated the development of new and complex financial products. Where would RTE be if it could not broadcast pictures of fellows in shirt-sleeves sitting in front of computer screens — a graphic of the modern financial sector? Within the European Union a new single market for financial services is being established. The financial sector now operates on a global basis using instant communications. Financial supervision standards are being intensified. In these circumstances, the need for new legislation to replace an Act nearly 200 years old is abundantly clear.
The new legislation also reflects the passage of two European Union directives. The Investment Services Directive, which must be provided for in national legislation by 1 July 1995 and will apply fully from 31 December 1995, requires member states to ensure a common standard of regulation for investment firms and to take steps in relation to supervision of regulated markets, including stock exchanges. The related Capital Adequacy Directive sets out the levels of capital which investment firms must have in relation to their business. Legislation to implement these directives in respect of other investment intermediaries is being prepared and it will be introduced in the House in due course. In the meantime, the Bill will meet our obligations in respect of stock exchange member firms arising under these two directives.
The Investment Services Directive is based on EU-wide recognition of authorities granted by the home member state and on the principle of prudential surveillance by the competent authorities in the home member state in accordance with that member state's rules. Investment firms which are authorised in one member state will, by virtue of that authorisation, be able to operate as investment firms in another member state. This has been made possible by the fact that prudential standards will be sufficiently harmonised. The directive incorporates parallel measures to those contained in the first and second Banking Directives, namely conditions for granting authorisation to investment firms, vetting of main shareholders and provision for close collaboration among the supervisory authorities in the member states.
Irish law needs to be updated to meet the requirements of the Investment Services Directive. At present, the Irish Stock Exchange — which is the product of the amalgamation of the Dublin Exchange with certain provincial exchanges which existed in Ireland until comparatively recent times — is supervised as part of the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited. This supervision is carried out under the rules of that exchange and also under local rules which apply to the Irish unit only and are agreed by the Minister for Finance. While the Minister approves rule changes proposed by the Irish Stock Exchange, he has no right to initiate rule changes which he might consider desirable. Otherwise the main requirement of the Stock Exchange (Dublin) Act, 1799, is that individuals selling gilts on commission have a licence to do so; in more modern times the licence requirement is met where a stockbroking firm employs a person who holds a gilt licence. While I emphasise the high level of supervisory standards here, it is clear that the legislative arrangements I have outlined need substantial revision in order to conform with the Investment Services Directive. So much for the background of the Bill.
I wish to refer briefly to the issue of insider trading. Insider dealing is a matter for general company law, not for a Bill about stock exchange regulation, and, as Deputies will be aware, provisions to cover insider dealing are contained in the Companies Act, 1990. I understand that the Company Law Review Group, under the aegis of the Department of Enterprise and Employment, is currently examining certain aspects of company law and that insider dealing is included in that examination.
On the principles on which the Bill is based, I would single out four for particular mention. The first is that the Government decided that the Central Bank should be the new regulatory authority for the Irish Stock Exchange and its member firms. This decision is both logical and practical. The bank already has considerable expertise in the area of regulation. It is the regulatory authority for all Irish licensed banking institutions and its remit has been extended to the building societies in recent years. In addition, the Central Bank Act, 1989 gave the bank supervisory responsibility for exchanges concerned with the selling of futures and options, such as the IFOX and now the FINEX exchanges. The bank also plays an important role in the regulation of financial-service activity conducted from the highly successful International Financial Services Centre.
In introducing the Bill, therefore, I am building on a significant body of national law on the regulation of financial institutions and exchanges. The bank has the expertise, the competence and the track record to supervise stock exchanges and their member firms. In addition, the personnel of the bank have been actively preparing for their new role and have made a substantial contribution to the preparation of this Bill.
The second principle I want to highlight is that, because this area is of major interest to the public, I am providing a significant role for Ministers. It is appropriate that, where necessary, the Ministers who have responsibility in this area should be able to set parameters within which the bank would operate. The Minister for Finance has a very direct involvement in the financial services sector; the Minister for Enterprise and Employment has responsibility for company law issues and has, of course, a particular interest in the access of Irish firms to capital. Accordingly, section 28 provides that the Central Bank may be given guidelines by the Minister for Finance with the consent of the Minister for Enterprise and Employment, to assist the bank in administering the system of regulation. Such guidelines will only be issued where there is a perceived need to issue them in the public interest, but I am sure the House will agree it is proper that Ministers should have a role in this area. Other sections of the Bill also provide a role for the two Ministers and I will refer to these when I am discussing the details.
I should, however, emphasise that, apart from some relatively minor modification there will be no change in the existing responsibilities of my colleague, the Minister for Enterprise and Employment, in company law matters, on issues relating to corporate governance or in matters delegated to the Irish Stock Exchange concerning listing or other procedures set down in recent Acts or regulations.
The third principle is that the fundamental objective has been to ensure that the Bill provides the necessary measures without being excessive. The new legislation is designed to ensure that the Irish Stock Exchange will be regulated to the highest standards, but like stock exchanges all over the world it must be able to function with maximum efficiency in an increasingly complex environment. Accordingly, the Bill does not supersede the highly developed supervision system which the Exchange already operates to ensure market surveillance. It, however, gives the Central Bank all the necessary powers to monitor and supervise the Exchange's surveillance of the operations of its member firms and to lay down conditions and requirements which the Exchange and its member firms must meet. Effectively, there is a strong element of self regulation here with the Central Bank overseeing the self regulation.
The fourth principle, connected with the third is that stock exchanges must be more open to the concerns of users and the public than has been the case up to now. Accordingly, the Bill provides that the board of directors of an exchange will have to be broadly based and the composition of the board will have to strike a balance between the interests of the member firms and users of the exchange, and the public interest. Furthermore, the board will have to include enough independent members to promote the protection of investors and the maintenance of proper standards of conduct and practice. It is particularly important, as the Irish Stock Exchange de-couples from the London Stock Exchange that we have that protection available for members of the public and we establish and maintain confidence among people investing in companies in the Irish economy.
On the provisions, I emphasise that I do not propose to comment on each and every section, but rather to highlight for Deputies the main features of each Part of the Bill.
The Bill is divided into seven Parts. The first deals with general matters, while Parts II and III deal respectively with the approval of stock exchanges and the authorisation of member firms. These two Parts naturally contain many similar provisions. Part IV contains detailed regulatory provisions governing stock exchanges and members firms. Part V concerns the duties of auditors, while Part VI deals mainly with large transactions in holdings of stock exchanges and member firms, with codes of conduct and with requirements relating to client moneys. Part VII covers enforcement, offences and penalties.
Part I contains standard general provisions about such matters as short title, commencement, repeals and expenses. In particular, section 2 empowers the Minister for Finance to appoint a day or days for the enforcement of the Bill or portions of it: this will enable its coming into effect to be synchronised with the separation of the Irish Stock Exchange from the London-based Stock Exchange of which it is now a part. I expect this to happen in spring next year.
Section 3 sets out the definitions in the Bill. The term used for stockbrokers is "member firm" and subsection (4) ensures that that term can include a partnership. The definition of "investment instruments" goes beyond the range of instruments normally traded on the Stock Exchange because the legislation is intended to cover all the investment activities of stockbrokers, who may well deal in unit trusts and other forms of investment. The definition of a stock exchange excludes futures and options exchanges, which are regulated under the Central Bank Act, 1989.
Part II deals with the approval and continuing supervision of stock exchanges. Section 8 makes it an offence to establish or operate a stock exchange which has not been approved by the Central Bank. Section 9 sets out the detailed requirements relating to approval. These include satisfying the bank that the memorandum and articles of association and the rules of the proposed exchange are satisfactory and that the directors, managers and qualifying shareholders are suitable persons.
I would draw attention to a number of aspects of the approval of an exchange. An exchange will be obliged to establish and maintain procedures to investigate complaints against both itself and its member firms. In addition, the board of an exchange will have to be broadly based and be so composed as to secure a balance between the interests of the different member firms and users of the stock exchange, and the public interest. It will be a matter for the Central Bank to satisfy itself that the board of the exchange has the required balance between members and non-members.
I would also draw attention to the fact that the rules of a stock exchange must require a report to be drawn up on any disciplinary proceedings conducted by the exchange and that report must be sent to the Minister for Finance and the Minister for Enterprise and Employment if the Minister for Finance, with the consent of his colleague, asks to see it. The Minister for Finance will be entitled to lay such a report before both Houses of the Oireachtas if he and the Minister for Enterprise and Employment think it proper to do so having due regard to the exigencies of the common good and the rights of any person referred to in the report. There is general agreement among Deputies on the need for greater transparency in the way stock exchanges are run and in their disciplinary proceedings; the provisions included will ensure transparency, while allowing the Exchange to continue to regulate its affairs on a dayto-day basis under the overall supervision of the bank.
The Bill provides that the Irish Stock Exchange will be deemed to be approved and will continue to operate, under the supervision of the Central Bank, during the interim period while it is seeking approval from the bank under this Bill. Any changes to the memorandum and articles of association of an exchange or to its rules will have to be approved by the Central Bank and the bank will be able to require such changes. Where the bank refuses to approve a stock exchange or to approve changes to its rules or memorandum and articles of association, the exchange will be entitled to appeal that decision to the Minister for Finance, who, with the consent of the Minister for Enterprise and Employment, may grant the appeal.
The Central Bank may make its approval of exchanges subject to conditions either at the time of approval or afterwards. Such conditions must not contravene guidelines which may be issued by the Minister for Finance with the agreement of the Minister for Enterprise and Employment. The exchange concerned will have the right to appeal a requirement or condition to the High Court.
Section 14 sets out the circumstances in which the bank may revoke the approval of a stock exchange. This will normally involve an application to the High Court for an order revoking approval.
Section 15 obliges an approved stock exchange to maintain such books and records for such length of time as the bank may specify: failure to comply with this obligation will be an offence.
Part III of the Bill opens with section 16. This makes the Central Bank the competent authority in this State in respect of member firms for the purposes of the Investment Services and Capital Adequacy Directives. The bank will be responsible for supervising all the investment activities of member firms, not just their stock exchange activities.
The rest of Part III deals with the authorisation and regulation of member firms. Section 17 makes it an offence to be a member firm of an approved stock exchange unless authorised by the Central Bank or by a competent authority in another member state. Firms wishing to become authorised must apply to the bank. The existing member firms of the Irish Stock Exchange will be able to continue to operate but will of course have to apply for authorisation to the Central Bank; they will stand approved, and be subject to Central Bank regulation, while the authorisation process is going on. Like stock exchange approval, this process will include satisfying the bank as to the probity and competence of each of the managers and directors and the suitability of the larger shareholders.
Any changes to the memorandum and articles of association of a member firm will have to be approved by the Central Bank and the bank itself will be able to require such changes. Where the bank refuses to authorise a member firm or to approve a change a member firm wishes to make in its memorandum or articles of association, the member firm will have the right to appeal the bank's decision to the High Court.
Section 22 enables the bank to make its authorisation of a member firm subject to conditions, either at the time of approval or afterwards. Such conditions must not contravene guidelines issued by the Minister for Finance with the agreement of the Minister for Enterprise and Employment. A member firm will have the right to appeal to the court against the imposition of any condition. Section 24 sets out the circumstances in which the authorisation of a member firm can be revoked; as with exchanges, this will normally involve an application to the court for an order revoking the authorisation.
Other provisions of Part III empower the bank to set out requirements as to the composition of a member firm's assets and liabilities so as to ensure the firm can meet its liabilities, and to require an authorised member firm wishing to establish a branch in another EU member state to give details of the proposed branch to the bank. The bank may permit or prevent establishment of the branch; if the latter, the member firm concerned may appeal the bank's decision to the High Court. Finally, section 27 obliges a member firm to keep books and records: failure to do so will be an offence.
Part IV of the Bill deals with regulation and supervision. Section 28 lays a general obligation on the bank to administer the system of regulation of approved stock exchanges and authorised member firms in accordance with the Bill in order to promote the proper and orderly regulation of such exchanges and member firms and the protection of investors. As I mentioned earlier, the bank must carry out this function subject to any guidelines which may be issued to it by the Minister for Finance with the consent of the Minister for Enterprise and Employment.
Section 29 empowers the bank to give directions to stock exchanges and member firms, both generally in the interests of proper regulation or investor protection and more specifically where it becomes apparent that a member firm is getting into difficulties. The bank will be entitled to apply to the High Court for an order confirming a direction where it believes that the direction is not being complied with. Detailed provisions relating to directions are included in the First Schedule to the Bill.
Sections 31 and 32 relate to advertising by stock exchange and member firms and give the bank power to impose conditions and requirements relating to advertisements. An agreement made as a result of an advertisement which contravenes conditions or requirements will be unenforceable unless the advertisement did not have a bearing on the agreement. Both the bank and the Minister for Finance may require a stock exchange or member firm to display specified information on their premises.
Part V of the Bill places significant obligations on the auditors of stock exchanges and member firms. Auditors are particularly well placed to assess what is going on in a firm and the Bill requires auditors to inform the bank of any material irregularity which emerges in the course of their auditing work, including anything which would give reason to believe that a member firm has breached stock exchange rules, that it has contravened any condition or requirement imposed by the bank or that it has bogus hauliers on its books. An auditor who intends to resign or not to seek re-election as auditor must report that fact to the bank. It will be an offence to mislead, deceive or refuse to co-operate with an auditor.
Part VI of the Bill opens with a provision which also deals with auditors. Section 36 enables the bank to appoint a second auditor where it has a substantial concern about the audited accounts of an approved stock exchange or member firm. This will allow the bank to carry out further investigation of matters which arise in the course of the first audit.
Section 37 contains provisions relating to disqualification from employment. Where, on application by the bank, the High Court finds that a person is not suitable on grounds of probity to be an officer or employee of a stock exchange or member firm, it may direct the employer to dismiss that person. Where the court finds that a person is incompetent, it may direct that the person concerned be removed from a particular position, suspended or dismissed. A person who is the subject of such a direction may not be employed by a stock exchange or member firm, or by any other entity supervised by the bank, without the bank's consent. A person who accepts employment in contravention of a direction will be guilty of an offence.
These are substantial powers but it is important to ensure that persons who are entrusted with the safekeeping and prudent management of the funds of others are above reproach. Deputies will also observe that a direction in respect of any such person will be for the courts to decide, and that the person concerned may apply to the courts at any time for the direction to be revoked and may appeal to the court against any refusal by the bank to consent to their re-employment.
Section 38 sets out the broad parameters for the codes of conduct which will govern how member firms do business with their clients. This will normally be a matter for the rules of an exchange, but there is provision for the bank to draw up a code of conduct if an exchange does not draw up and maintain its own rules of conduct. Stock exchange rules of conduct must of course meet the parameters laid down in the section as regards fair and honest dealing, acting with due care and diligence and making adequate disclosure of relevant information to clients. The bank will be responsible for supervising compliance with rules of conduct by member firms operating here which have been authorised in another member state.
Sections 39 to 49 deal with acquiring transactions, that is to say major changes in the ownership or control of exchanges and their member firms. The purpose of these provisions is to enable the bank to prevent undue or excessive influence being gained over a stock exchange or member firm unless the bank is satisfied that that influence will not be harmful. Section 51 provides that a member firm must inform a client of the details of any investor compensation scheme. The Irish Stock Exchange already operates a compensation scheme but I am not making specific provision in this Bill for compensation because the Investor Compensation Directive is still being discussed at EU level. Assuming the directive will have been finalised in time, however, I would propose to include whatever measures it requires, in relation both to stock exchange member firms and to other investment intermediaries, in investment intermediary legislation which is being prepared under the aegis of my Department at present.
Section 52 sets out rules for the segregation of client funds and investment instruments. It will be an offence not to comply with the provisions of this section.
Section 53 provides a warranty against liability for the Central Bank and the Stock Exchange in the exercise of their functions under this Bill. The last section in Part VI relates to failed stock exchanges and member firms which did not comply with the obligations in the Bill to maintain proper books and records and safeguard clients' funds. Where the High Court considers that such non-compliance contributed to the failure, it may declare an officer of the stock exchange or member firm personally liable for all or part of the failed entity's debts. Similar provisions exist in company law and in the Building Societies Act, 1989, and I am sure Deputies will agree they are appropriate here, too.
Part VII of the Bill sets out the powers of authorised officers of the Central Bank, bank-appointed inspectors and inspectors appointed by the High Court. Authorised officers of the Central Bank will be empowered to enter premises to inspect documents and require explanations of such documents. If a person refuses to comply with a request from an authorised officer, the court can be asked to make an order as to the information to be provided. Similar provisions are included in the Insurance Act, 1989, in relation to officers authorised by the Minister for Enterprise and Employment; an authorised officer under this Bill will in addition be entitled to request a report on aspects of the business of an exchange or member firm.
Sections 57 to 63 provide for the High Court, on the application of the bank, to appoint an inspector to investigate the affairs of a stock exchange or member firm. In addition to having powers similar to those of an authorised officer, an inspector appointed by the court will be able to examine people on oath. The High Court may publish, with or without omissions, the report of an inspector appointed by it. A court inspector's report will be sent in full to the Ministers for Finance and Enterprise and Employment, who may decide to lay it before the Houses of the Oireachtas.
Section 64 provides for the appointment of an inspector by the bank to investigate particular matters relating to an exchange or member firm, including their compliance with any requirements of this or any other Act or with stock exchange rules or codes of conduct. The bank may publish, in whole or in part, the report of an inspector appointed by it, and must forward any such report in full to the Ministers for Finance and Enterprise and Employment, who again may decide to lay it before the Oireachtas.
Section 65 enables the bank to set up a committee to determine whether there has been a breach by a stock exchange or member firm of bank conditions or requirements. Such a committee will have three members, drawn from a panel of seven to be nominated by the Minister for Finance with the consent of the Minister for Enterprise and Employment. If it finds there has been a breach, the committee may issue a reprimand or require payment of up to £500,000 by the exchange or member firm concerned to the bank. It should be noted that this mechanism will only apply where the exchange or member firm agrees, and an exchange or member firm may appeal the determination of a committee to the court. Where an exchange or member firm does not want the matter settled by a committee, the bank may apply to the court to make a determination, and the court may issue a reprimand or require payment of up to £500,000 to the bank by the exchange or member firm concerned. Detailed provisions relating to committees appointed under section 65 are contained in the Second Schedule. Such committees offer a mechanism whereby breaches of bank conditions and requirements can be speedily determined without the expense — on either side — of a High Court hearing.
Sections 66 and 67 provide for an application for a search and seizure warrant by an authorised officer and for the admissibility of an inspector's report as evidence in civil proceedings, while sections 68 and 69 provide for legal professional privilege and for confidentiality of documents. Section 70 sets out the penalties for offences committed under the Act. The maximum penalty will be £1 million or ten years' imprisonment or both.
Before concluding, I would like to say a few words about future developments in the Irish Stock Exchange. As I have mentioned earlier and is already well known, the Irish Stock Exchange will be separating next year from the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited of which it is at present a part.
However, it is of course not intended that the benefits of the close collaboration that has existed between the two parts of the London-based exchange will be discontinued. Close co-operation existed before the 1973 merger and will continue after separation. A primary objective in the discussions between Dublin and London about separation was to maintain the closest possible links in future for the mutual benefit of both. An agreement has been reached with the UK Securities and Futures Authority — SFA — the self-regulatory organisation responsible for regulating stockbrokers in the UK, to provide continuing advice and technical support to the Irish Stock Exchange in the initial period of separation. In addition, the Irish Stock Exchange, in conjunction with users of the exchange, has commissioned a study of the future needs of the Irish equities market, including the question of whether linking with the planned CREST transaction settlements system which is being proposed in the UK is appropriate. I understand that a final; decision is expected in the next couple of months.
The Irish Stock Exchange will remain the competent authority for stock exchange listing in Ireland and will continue with its responsibilities under the Companies Acts, including those relating to insider trading. The Minister for Enterprise and Employment is considering what arrangements will be necessary to replace the functions at present carried out by the UK Panel on Takeovers and Mergers when the Irish and London exchanges separate.
Finally, I should mention that my Department has of course consulted the Irish Stock Exchange in the preparation of this Bill. I acknowledge the constructive contribution made by the Stock Exchange throughout this process.
This Bill marks a radical departure for the regulation of stock exchanges and their member firms in Ireland. It replaces legislation two centuries old with a modern regulatory framework. It establishes the Central Bank as the regulatory authority, so bringing to bear the bank's wide experience of regulating banks, building societies and futures and options exchanges. It provides a significant role for the two Ministers closely involved with the Stock Exchange, so ensuring that the legitimate concerns of the Oireachtas can find expression in the regulatory process as the need arises and as the public interest requires. It enables the Stock Exchange to continue market surveillance, but under the overall supervision of the Central Bank, which will be equipped with all the necessary powers for carrying out its functions. It meets obligations in respect of stock exchange member firms arising from the European Union Investment Services and Capital Adequacy directives. It ensures that the Stock Exchange will be more open and transparent in the conduct of its business than has been the case up to now and that its board of directors will be representative of the users of the exchange and the public interest as well as of its members.
The Bill will enable the Exchange to continue to carry out its business in the most efficient way possible in an increasingly complex environment, while at the same time providing investors with the fullest confidence that the exchange is regulated to the highest standards. This combination of freedom to transact business efficiently with high regulatory standards is vital to the survival and development of the Stock Exchange and its member firms. I believe the Bill provides this combination and I am sure it will enable the Stock Exchange and its members to face the future with greatly increased confidence.
There has been much criticism of the areas of investment and capital availability for Irish companies. It is said that people have relied to too great an extent on debt financing and that there has not been a sufficiently active market in equity financing for those companies. I hope that with our independent Stock Exchange, operating under the highest standards of regulation, we will see an expansion in risk and equity investment in Irish business and enterprise and that this Bill will prove a springboard for the creation and growth of Irish business and jobs.
I commend the Bill to the House and look forward to hearing the contributions of Members.