Markets in Financial Instruments and Miscellaneous Provisions Bill 2007: Second Stage.

Tánaiste and Minister for Finance (Deputy Brian Cowen)

I move: "That the Bill be now read a Second Time."

This Bill started out as a very short item of legislation. Just a few short sections were needed to complement the regulations which I made last February to transpose the EU Markets in Financial Instruments Directive or MiFID into Irish law. The whole new MiFID regime comes into effect for the industry across the European Union with effect from 1 November next. While the deadline for transposition of the directive was 1 February 2007, the relatively long lead-in time before it comes into effect was sought by industry throughout the EU to allow it to train staff in the new provisions and especially to make the extensive updatings required to its IT systems.

The transposing of the MiFID statutory instrument is Statutory Instrument No. 60 of 2007, and it is called the European Communities (Markets in Financial Instruments) Regulations, 2007. Given the volume and complexity of these regulations that run to 259 pages, it was perhaps inevitable that subsequent close scrutiny by industry and the Financial Regulator would identify a few areas where clarification, amendment or correction might be appropriate. I was pleased to be able to meet these concerns in the amending regulations which I signed last week.

The core issue that needed to be addressed in this Bill was the requirement to introduce penalties at national level for breaches of the new MiFID provisions. Minor infringements were taken care of in the MiFID statutory instrument of last February, but the scale of the penalties for conviction on indictment for breaches of the new MiFID legislation, namely, fines of up to €10 million and-or ten years imprisonment, is such that primary legislation is required. That requirement for primary legislation was the immediate reason for bringing forward this Bill.

However, it is also necessary to empower the Financial Regulator to be able to levy fees on the financial services sector towards the cost of implementing its new MiFID functions and responsibilities in the same way as arises for other regulatory provisions enforced by the Financial Regulator.

Finally, in this context, it is necessary to repeal the Stock Exchange Act 1995 as its provisions are being superseded by the MiFID statutory instrument. I wish to make clear to Deputies that the penalties involved — fines of up to €10 million and-or ten years imprisonment — are not unique to this legislation. Such penalties are already set out in the Investment Funds, Companies and Miscellaneous Provisions Act 2005.

The MiFID directive is one of the most significant items of EU financial services legislation agreed in recent times and applies to both investment firms and credit institutions when providing investment services. The aim of the MiFID directive is to create a pan-European market in investment products by replacing a patchwork of national rules with harmonised EU-wide regulation and investor protection so as to allow investment firms to sell investment products and services outside their home markets, across the Union, based on a single licence from their home country regulator.

The MiFID also aims to increase transparency and to reduce costs for users of financial instruments such as equities and shares, bonds and derivatives, for example, credit or commodity derivatives or financial contracts for differences. This is being achieved through standardised rules on the dissemination of quotes and on pre and post-trade transparency, as well as best execution practices.

The MiFID directive replaces the 1993 Investment Services Directive, the ISD. The effectiveness of the ISD's "passport" had been undermined by member states imposing their own local consumer protection requirements. Investment firms wishing to trade across the EU had, heretofore, to comply with 25 sets of rules. It was essential, therefore, that investor protection provisions in this area be harmonised and also updated across the Union so that investors could avail of greater competition in investment firms' services on a cross-border basis. It was also important to bring new services such as investment advice and new financial instruments such as derivatives within the scope of the legislation.

A significant development under MiFID is the creation of a new regime for investment firms who buy and sell shares on "own account" outside of a regulated market — known as "systematic internalisers". It clarifies that the operation of an electronic-based trading system that matches buy and sell orders, known as a multilateral trading facility, MTF, is covered by the MiFID passport. Consequently, all share transactions will no longer be required to be executed in a stock exchange, thus facilitating competition from multilateral trading facilities.

The MiFID-related provisions in this Bill are important and urgent because they need to be in place in advance of the "going live" date for this directive of 1 November next. Similarly, the Stock Exchange Act must be repealed under this Act from that date.

This directive is a further element of the comprehensive and detailed EU-wide framework for regulation of financial services which is implemented in Ireland by the Financial Regulator. Arising from developments in global financial markets in recent weeks, I wish to reiterate briefly a number of key points which I have previously highlighted regarding the quality of Ireland's financial system and its regulatory regime.

The single most important point to be made in the national context is that Ireland's banking system is well-capitalised, profitable, liquid and soundly regulated. This is confirmed by the conclusions of the recently published IMF report which also noted that the Central Bank is satisfied major lenders here have a solid financial base. As far as the effectiveness of the Irish regulatory system is concerned, the IMF report explicitly acknowledged the strengthening of the financial regulatory and supervisory system in Ireland over recent years which conforms to international best practice standards.

It is important to highlight the Central Bank and Financial Services Authority of Ireland, CBFSAI, integrates within a single institutional structure both the supervision of individual financial firms by the Financial Regulator and the monitoring of overall financial stability, which is the responsibility of the Governor of the Central Bank. This structure yields significant advantages in terms of the appropriate co-ordination of these two activities under the current legislative framework. In addition, the Central Bank and Financial Services Authority of Ireland operates within the overall context of the euro system and the European Central Bank which has ensured a consistent and coherent approach across the euro area to addressing current uncertainty in financial markets.

In contributing to the further development of financial services regulation at EU level, important lessons are to be learned from recent developments in global financial markets. This process of review and examination is already under way. A key issue following recent events in the UK is the effectiveness of deposit protection arrangements across the EU. The European Commission has recently concluded a review of the Deposit Protection Schemes Directive which sets the framework for national schemes in the EU. It is necessary to look again at this work and in the light of recent developments to make sure that deposit guarantees strike the right balance between protecting depositors and making sure banks are not encouraged to take inappropriate risks.

When a Bill of this nature is proposed in a Department, it often affords a welcome opportunity to address a variety of other reforms which would not merit a separate Bill in their own right but which, nevertheless, are important to the stakeholders affected by the measures in question. It is that consideration which accounts for the "miscellaneous" part of this Bill.

There are nine miscellaneous provisions in the Bill as published and I shall deal briefly with them in the order in which they appear. Section 9 provides for sanctions similar to those for MiFID which I mentioned earlier, that is, fines of up to €10 million and-or ten years in prison, for conviction on indictment for breaches of the Reinsurance Directive as transposed by S.I. 380 of 2006. It should be noted that the intention of this provision is to provide the option of a more severe set of penalties for serious breaches of certain provisions in the reinsurance regulations. Minor offences, as a matter of course, will continue to be dealt with through the administrative sanctions system and-or as summary offences.

Section 10 is an amendment of the Netting of Financial Contracts Act 1995. This Act provides protection for netting or set-off arrangements between parties to financial contracts in the event of insolvency. Given the rapid pace of change in financial services, provision now needs to be made to widen the definition of financial contracts in response to market developments.

Section 11 deals with the Investment Intermediaries Act 1995 to confirm certain limitations of receiver or liquidator access to client money following the winding-up of an authorised investment business firm, and implements an important recommendation in the report of the Morrogh review group published in November 2006.

Section 12 provides for a simplification of the State ownership of Icarom plc under administration — formerly the Insurance Corporation of Ireland, ICI. The main role of Icarom is to run off ICI's pre-1985 liabilities, mainly in respect of its US risks. The simplification of the legal structures, by removing the holding company Sealúchais Árachais Teoranta, is in the interests of making it easier for Icarom to deal with litigation in the US courts. Given that the Oireachtas approved the establishment of Sealúchais Árachais Teoranta by way of primary legislation, the Insurance (Miscellaneous Provisions) Act 1985, it is appropriate that its proposed dissolution be approved by the Oireachtas.

Section 13 introduces a variety of minor amendments to the Central Bank Act 1942, as follows. First, there is an extension of the deadline for submission of its annual budget by the Financial Regulator from end-September to end-October of the preceding year. Given the complexity of the Financial Regulator's budgetary process, an extension of the time period is required. Second, there is an amendment regarding disclosure of confidential information from the Financial Regulator to the National Consumer Agency. The purpose of this provision is to put beyond doubt the right of the Financial Regulator to disclose confidential information to the National Consumer Agency for the performance of the agency's functions. This is subject to any EU confidentiality constraints on the Financial Regulator. Third, an amendment extends the immunity from costs arising from the discharge of their duties to members of the Financial Services Ombudsman Council. It will ensure members of the council are not liable for damages arising from the discharge, in good faith, of their statutory duties. Fourth, an amendment relieves the Financial Services Ombudsman of a requirement to provide the Financial Regulator with certain details where it decides not to investigate or to discontinue an investigation. The Financial Services Ombudsman was established as an independent body in its own right. The existing provision may give the impression of an element of accountability to the Financial Regulator which was never intended. This amendment will clarify the Financial Services Ombudsman's independence. Fifth, in order to ensure continuity of membership and to minimise any potential disruption to the efficient working of the Financial Regulator, the amendment permits the number of required compulsory retirements from the board to be reduced by the number, if any, of voluntary resignations which may have occurred between the relevant anniversary dates.

Section 14 makes miscellaneous amendments to the National Treasury Management Agency Acts 1990 and 2000, as follows. Paragraphs (a), (b) and (c) extend the NTMA’s central treasury service, which currently offers competitive deposit and borrowing facilities to local authorities, to new categories of bodies such as non-commercial semi-State bodies, the Courts Service, universities and colleges, the Railway Procurement Agency and the Housing Finance Agency, HFA. The extension of the treasury service to the HFA in particular will allow the NTMA to provide the HFA more efficiently with the short-term funds needed to manage its cash-flow requirements.

Section 14 also allows the NTMA to engage in swap transactions in regard to its lending activities with local authorities and semi-State bodies through the central treasury service and in lending to the Housing Finance Agency through the Post Office Savings Bank fund. This will allow the NTMA to offer the fixed-rate loans sought by those bodies while hedging the risk involved for the NTMA through interest rate movements. The NTMA is already allowed to engage in swaps and other derivative transactions in relation to its debt management activities, and in futures and options transactions, but not swaps, in regard to the Post Office Savings Bank fund. In line with the NTMA legislation generally, these provisions will apply to the Minister for Finance, who will then delegate the powers to the NTMA.

Section 15 is an amendment to provide that the NTMA may use the foreign currency clearing accounts established under section 139 of the Finance Act 1993 for foreign currency transactions other than debt-related transactions, namely, the National Pensions Reserve Fund.

Section 16 makes amendments to the provisions dealing with ministerial pensions, as follows. First, former office holders — Ministers and Ministers of State — on leaving service are entitled to receive severance for up to two years. Circumstances can arise where, through oversight or otherwise, a former officer holder does not apply for the pension within the specified time period, namely, within six months of severance payments ending. The amendment would give the Minister for Finance the discretion to backdate the payment of pension in the case of an application made outside the six-month limit to the date of entitlement and reflects a similar provision which applies to Civil Service pensions. Second, whereas the current ministerial pensions scheme allows for a pension to be payable after two years service as a Minister, the "old" pre-1993 scheme requires three years service. This amendment would provide for payment of a ministerial pension to a member of the "old" pre-1993 scheme who has more than two years service as a Minister. This has been the position for members of the "new" scheme since 2001.

Section 17 has been brought forward at the request of the credit union movement. It provides for a practical interpretation of the lending limits which apply to loans where the period on the loan falls below the periods specified in the legislation. This arises from the implementation of the report of the review group on longer-term lending by credit unions. This change has already been effected on a provisional basis by way of S.I. 193 of 2007 — the Credit Union Act 1997 (Alteration of Financial Limits) Regulations 2007 — but the Attorney General has advised that the change should be confirmed in primary legislation, hence this provision.

The reason the Bill requires early attention is that the imposition of significant penalties for conviction on indictment for breaches under this directive's statutory instrument provisions needs to be in place in advance of the implementation date of the directive on 1 November next across the EU and also to repeal the Stock Exchange Act 1995 with effect from that date. I must advise the House, however, that I shall bring forward a number of additional measures by way of Committee Stage amendments. Some of these are merely minor technical administrative provisions but some significant new initiatives are also included, such as the proposal to bring within the sphere of financial regulation the activities of non-deposit-taking lenders. This will enable the application of the Financial Regulator's consumer protection code to all consumer lending, including what is described as sub-prime lending, which I undertook to ensure earlier this year. The final details of this proposal are currently the subject of a public consultation exercise until next Friday, 5 October. Once the public consultation has concluded, I shall move quickly to finalise my proposals in time for Committee Stage. Details of the public consultation are on my Department's website.

As I have outlined, the issues addressed in this Bill largely relate to some important, albeit technical, issues. The Bill completes the final element of the implementation of the directive, which will yield significant benefits to both Irish investors and Irish-based investment firms as well as addressing a range of outstanding technical reforms to various Acts falling within my remit. I trust, therefore, that the House will be amenable to a positive and constructive consideration of the Bill's provisions. I commend the Bill to the House.

Deputy Richard Bruton

The measures the Minister intends to introduce on Committee Stage are probably of more interest to us than much of what is already contained in the Bill, so I look forward to Committee Stage with interest.

There is no doubt we are entering a period of considerable economic uncertainty compared to recent times. In the past couple of months we have seen what would have been previously unthinkable — a run on a bank where many depositors have money saved, the wipeout of 30% of the value of financial stocks on the Irish Stock Exchange and a credit crunch which is continuing to exercise its grip across Europe. The economic uncertainties in those markets are compounding difficulties we face domestically.

It must be noted that these events have not come out of a clear blue sky. The warning signs of Ireland's vulnerability have been evident for some considerable period but the Government has chosen to ignore them. We are well past the time where one could call this credit crunch an early warning or a wake-up call. We have been aware of this vulnerability for a considerable period and now require a comprehensive strategy for economic renewal to move the economy away from its high reliance on debt finance and the property sector. This reliance has not only driven very high prices in those sectors but created problems in traditional sectors such as exports, on which a small, open economy depends for its survival. We must recognise that the economy is entering a challenging period.

Ministers will argue that the glass is half full whereas commentators will argue that it is half empty but no one can pretend that the challenges facing the economy are not much more serious than official Government statements admit. If the economy fails to make a series of significant transitions, the progress made to date will be endangered.

For the past two years, the Central Bank has almost been a lone voice in spelling out the financial vulnerabilities which have built up in the economy. Last year, credit growth increased by 30%, an extraordinary rate, while dependence on debt, which currently stands at two and a half times gross national product, is far in excess of all other countries in the European Union. These statistics clearly demonstrate a vulnerability.

For some time, the Central Bank has been pointing out that the concentration on property as a basis of lending is twice as high among Irish financial institutions as it is among their counterparts in other European states. In addition, the property market, which is considered to be significantly over-valued and is experiencing the double squeeze of rising interest rates constraining affordability and historically low rental yields, is clearly in a vulnerable position.

In recent years, the Central Bank has been relentless in pointing to the widening funding gap in financial institutions. In 2000, 77% of lending by financial institutions was covered by domestic retail deposits. This figure has since declined to 54%, far below comparable rates in the rest of Europe. As a result, Irish banks are particularly dependent on the inter-bank market. For this reason, when the rates in the inter-bank markets increase far above the ECB rate it is bad news for Irish financial institutions. It is not surprising, therefore, that their stock values have been hit.

We must prepare to tackle the issues. As the Minister noted, we can console ourselves that sub-prime lending is at very low levels here and the banks, by and large, have been exercising a more prudent approach to stress-testing mortgages than has been the case elsewhere. While these factors provide a certain cushion against the possible consequences of the credit squeeze, we must await events in the coming months to determine the extent to which this squeeze, which has its origin in commercial paper of questionable value, will bite home. The Central Bank has provided strong reassurance on this issue but I presume central banks and financial regulators in other countries are providing similar reassurances about their respective financial institutions. Third quarter results produced by two banks today show considerable exposure which had not been predicted. As Alan Greenspan colourfully explained, we will only know who is swimming naked when the tide goes out. It will take time to discover who holds the securities whose values have been severely questioned.

Apart from these financial challenges, the economy has economic vulnerabilities with which we must get to grips. The most recent inflation figures in the HICP, the harmonised index of consumer prices which compares prices across Europe on the same basis, showed that Irish inflation, excluding mortgages, is running at 50% higher than the rate in the rest of the eurozone. This is a serious indication that Ireland is not only the dearest country in Europe but the gap between the cost structure here and those of other eurozone countries is increasing at an accelerating rate.

According to today's third quarter returns, the increase in Government expenditure, at 18%, is three times higher than the rate of tax revenue growth, at 6%. This difference is a consequence of the Government paying more heed to the needs of the electoral cycle than to those of the economic cycle when it framed its strategy in the most recent budget.

In recent years, our competitiveness has been significantly damaged across a wide range of areas, notably in public utilities under the control of Government or subject to Government regulation. Ireland's loss of export market share for four years in a row is showing up in strains on our balance of international payments. Productivity growth is at one of its lowest rates in more than 20 years, a reflection of the strength of the economy's dependence on the property sector. Furthermore, productivity has slumped in trading areas, which are crucial sectors for small open economies.

A review of the 2002 to 2006 period of the strategy on climate change, another major challenge coming up the track, shows that it achieved 0% of the Government's target in terms of climate change adjustment, an extraordinary figure. While the current Minister for the Environment, Heritage and Local Government may not believe climate change will go away, his predecessors believed the chalice would pass them if they kept their heads in the sand.

The Government must set out a strategy to tackle financial issues and other, more serious underlying challenges coming down the track. The first of these is the financial issue. As the Minister noted, the European Union is examining our deposit protection scheme. The British Government has signalled its intention to raise the deposit protection cover from €35,000 to €100,000. In such an eventuality, why would people hold money in Irish accounts if they could enjoy much greater protection by depositing money in accounts in the United Kingdom? We must underpin confidence in the banking system, offer consumers protection and ensure we do not find ourselves out of line with our nearest neighbour.

While I welcome the provisions regulating sub-prime lenders, I wonder whether it is sufficient to apply consumer codes to their operations. The legislation will introduce suitability tests obliging sub-prime lenders to check the suitability of applicants for loans. We also need to know about the fitness to trade of those involved in the sub-prime market. I am not sure the code the Minister is extending to this sector addresses prudential issues and fitness to trade in a manner that provides the necessary reassurance.

The Minister did not advert to the need to examine the regulation of the relevant securities or the rating agencies which have been at the heart of how these securities have been valued. The European Union appears to be holding back on revealing its hand in this area in which conflicts of interest are clearly rampant. Much of the problem with the sub-prime market is that those who write the business tend to sell it on within six months. Questions arise as to whether a person who writes business he or she will no longer hold six months later will consider the long-term security of loans. While I do not propose prohibiting the repackaging and selling on of mortgages, much greater testing of the robustness of those writing the business is necessary. Selling business within six months of writing it creates the contagion problem because business originating in the United States may be held by a bank in Japan or a pension fund in Ireland. One does not know where it ends up. Rather than clog up the whole system, we must go back to the origin and ensure that mis-selling does not occur and proper standards apply.

The rating agencies used to be independent bodies providing stock ratings but are now in the business of advising those seeking to have their stock rated on how to get a good rating. As such, they take a position on two sides of the argument. Much of the prudential controls operated by the Central Bank and Financial Regulator are based on these ratings. For example, the Ormond Quay company was given a triple A rating, better than any Irish bank, but its parent company needed to step in with €17 billion when its rating went down. The Minister is right to extol the strength and broad balance of our banks, but Ormond Quay had its eggs in a narrow range of baskets. There are question marks over the agencies and how people sell their business.

I do not know much about the casual occurrence of many Irish people remortgaging their homes to buy properties in emerging countries. Who protects consumers where people set up property schemes in local hotels? It is questionable to give five-year rent guarantees for areas where the average wage is so low that the typical person cannot afford to pay the rent for that long.

Other than the sub-prime market, are there sectors in which there is potential misselling? Perhaps "misselling" is too strong. Are people walking into commitments with their eyes closed or without enough information and making commitments that have considerable implications for their financial stability and that of the underpinning system? I do not want to raise hares, but there is a great deal of business taking place in which people commit large sums of money. Do we need to examine some of these areas to determine whether they need minimum consumer protections of the sort the Minister believes should be extended to the sub-prime market? The maximum protection in terms of a deposit scheme is 90% or €20,000, whichever is smaller. The British will move ahead of that, as should we.

While the Bill's provisions regarding credit unions are unclear, the Minister is proposing changes to how much the unions can lend. Greater flexibility has been an issue for some time and talk of deposit protection raises the question of protection in credit unions. I am sure that, like me, the Minister has received representations from different groups within the credit union movement. Some stated the current system is robust while others stated it was anything but robust. The regulator is not happy with the situation and there have been long meetings to determine whether a robust system can be developed. As a matter of urgency, the Minister must bring those meetings to a conclusion and come up with a system in which we can have confidence.

Everyone is reviewing the matter, which we have known to be problematic for some time, and we must move rapidly. Senator O'Toole is tabling legislation in the other House. I do not know whether it is the best way forward, but I suspect the Minister is seeking a solution short of legislation to make the savings protection scheme work and to have it and its rules seen to be transparent when intervention occurs. As much of the scheme is discretionary, people do not know who is protected. There must be clarity in this regard. The Minister has raised the issue in his legislation and he must move on it as quickly and calmly as he can. I hope that before the Bill's completion, he will reassure the House that the situation is being dealt with and the system is robust.

Newspapers have questioned the soundness of the Irish regulatory system in respect of Ormond Quay, a German company. I have been led to believe that the criticism is unfounded, the company was regulated in Germany and the Irish authorities co-operated with German oversight in a proper way. As some newspapers have made a considerable meal of the matter, the Minister needs to make a clear political statement to the effect that the system is working adequately.

According to the Minister's press release after the ECOFIN meeting, the EU believes there is work to be done in respect of the co-ordination between regulatory authorities in different jurisdictions. Will the Minister advance this work in an Irish context to ensure robust systems for co-operation? Many companies established here do not have Irish banking licences and, as such, are not regulated here, but they are important to the Irish economy. If there is any suggestion of their not being properly overseen, the Minister should make a clear statement expressing confidence in the system. He should reassure people that the system works well, there are proper levels of co-operation and information is properly used and acted on wherever appropriate.

The Minister has endorsed the way in which our system, a two-headed body in one institution, overcomes the UK's problem where the regulator, the central bank and the Treasury move in different directions. The ECB does not intervene directly in markets and depends on central banks responding when it wants to intervene. It has been successful to date, but the chain is only as strong as its weakest link. While everyone might look smugly at the UK and its apparent difficulties, it is important to ensure at EU level that the links in the euro chain, the central banks, have been stress-tested. We should not pretend there are no difficulties elsewhere.

More needs to be done to show Ireland is dealing with financial threats than the Minister has stated. The credit crunch has not been resolved at European level and credit here or among our main trading partners could become very tight. We must respond to this issue rapidly to ensure the credit crunch does not develop into a credit crisis.

It is time for a comprehensive strategy of economic renewal like the Culleton strategy of some years ago. Ministers and others talk about competitiveness, but we must show that we are doing something about it by taking measurable actions in critical sectors. The Government has not driven the productivity and efficiency agenda in the public sector with the necessary purpose. We have lost ground in that respect, fudged the issue of reform and delayed in delegating responsibility for outcomes and holding people accountable. We are behind the eight ball compared to other countries. We must confront the excessive costs, many of which are generated in Government-regulated sectors. We cannot continue to pretend this problem will not bite us.

Climate change challenges are making the situation worse due to our high reliance on oil for a number of critical utilities, but there are inefficiencies in how we regulate and detect irregularities in the markets. Ministers must set targets to reduce inflation to EU levels and below in critical areas of domestically generated costs. We require also a much clearer statement of the investment priorities to be adopted.

There is scope in the forthcoming budget to accelerate investment in good, robust projects. It appears the building industry will have a capacity which was not there previously. To justify the acceleration, the Minister must agree to the publication of the appraisals of the projects. People must be properly and publicly accountable for delivery. It is unacceptable that NDP appraisals continue to be done in secret on the basis of a pretence that they are in some way commercially sensitive. The data must be published and Ministers and others must stand over projects and ensure they perform in accordance with the appraisals. The issue must not be fudged as it has been in the past. The planning model must be reformed. In cases like that of the school in Balbriggan, we continue to see complete incompetence in departmental planning. There was a failure of planning to match obvious growth to future need. Where houses are built, children will follow. The failure has to be cracked. We must see measurable action whereby we can establish whether change is taking place.

We must see measurable action also in the reskilling of workers. We know that 30,000 people may lose their jobs in the construction sector. They will not be easily reabsorbed in manufacturing where the traditional employment outlets are also drying up. General operative positions are not available. We must get set clear targets on reskilling and deliver them.

We must become early movers in critical areas. The programme for Government states that we are to cut compliance costs by 25%, but the Government has not measured their current level. It has not set out the benchmark or starting point which is to be cut by 25%. The benchmark has to be stated so we can know next year by what percentage costs have been reduced. What areas is the Government to tackle and how will valuations be conducted to ensure that the reduction is by the intended 25%? Does 25% in this context mean anything? It must if it has been included in the programme, in which case we have to see it. The time for rhetoric on the challenges we face is over. We need Ministers to sign up to measurable targets in the key areas which are crucial to Ireland's long-term competitiveness. It could undermine the great success we have had if Ministers fail to square up to their responsibilities. Most of the challenges we face are not primarily the responsibilities of individual businesses, they are the responsibility of Government to deliver.

The Minister says one of the aims of the Bill is to create a more competitive Stock Exchange. I have been told that we are a long way behind the eight ball in stock exchange efficiency. If an individual wishes to trade on the stock exchanges in other jurisdictions, he or she may do so directly through trading websites. The commission may be €10 per trade as opposed to the percentile commissions which apply here. If the Bill is intended to achieve greater harmonisation of conditions of trade, the Minister should compare the performance of the Irish Stock Exchange in this context with exchanges in other countries. It is not sufficient to introduce the Bill with a sage nod to suggest we are doing everything the EU asks. We must set measurable targets to achieve harmonisation and liberalisation in the markets we say we are addressing. If we do not ensure Government accountability, functioning measures and tangible differences, the Opposition will not be doing its job.

I look forward to Committee Stage on which I notice there will be all sorts of debates, including one on ministerial pensions. The Bill contains quite a rag-bag of provisions. Given the indication that there will be ministerial amendments on Committee Stage, I anticipate an interesting debate.

Deputy Joan Burton

This is the first opportunity the House has had to converse with the Minister for Finance on financial matters since the general election. To paraphrase Yeats, all is changed utterly. We received word today that the Minister acknowledges now that the deficit by the end of the year will be €1 billion, which is at least €500 million more than he indicated at budget time. There have also been extraordinary developments with the credit crunch and collapses in banking which have seen people queue to get their money back from banks, a sight not seen in these islands for a long number of decades.

The model of regulation adopted by Fianna Fáil and the Progressive Democrats, which continues to be employed, involves regulation of the financial services industry with a very light hand. The financial services industry is a very important and valuable employer providing many well-paid jobs, especially for younger people and graduates at the IFSC, and related accounting and legal employment, which are highly attractive. Like the Minister, I have seen income and other tax revenues generated from people working in financial services. It is important that the financial services industry, therefore, operates with prudence and consciousness of the importance of reputation. Historically in financial services, reputation is the guarantee of future expansion and growth. Therefore, the Minister's silence on the model he has selected of regulation with a very light hand deserves to be questioned.

Much as they like to present themselves as masters of the universe, many bankers and stockbrokers have been shown at the end of a long bear market and beginning of a potentially lengthy bull market to be emperors with very little in the way of clothes. Most people in politics recognise that comprehension of financial products, especially derivatives, is taxing. To a significant degree, these products are developed and sold internationally from the IFSC. Other than those who have recently obtained a business degree, accountancy qualification or in some cases a PhD, very few people, certainly in this House, understand much about modern financial transactions and products like derivatives. In this context, the Bill is timely. The last couple of months have shown that an Irish economy which is overly reliant on the construction sector may experience a credit crunch which affects financial services and puts at risk some of the employment they have generated. While the Bill seeks ostensibly to implement European regulations, it represents also a welcome and important opportunity to have a conversation about the direction of our economy and financial services. I want to raise a number of issues in that regard. Reference is made in the Bill to the Stock Exchange. The Minister is aware that more than 50% of the transactions made on the Stock Exchange over the past couple of years have involved contracts for difference, CFDs, a product which was not known in this country before 2002. In his 2005 budget speech, he announced his intention to bring an amendment which would provide for stamp duty on CFDs. Surprisingly for someone as politically robust as the Minister, he told the Dáil a couple of months later that he was withdrawing the amendment, which had already been advertised on the Revenue Commissioners' website, following advice he had presumably received from brokers.

A number of Irish brokerage firms have made a lot of money from CFDs, although these contracts are now rapidly disappearing as a financial services product. I am told that certain high net-worth individuals, probably including some of those who are happy to pay no tax, have incurred losses on a personal basis of up to €15 million on CFDs entered into on the Stock Exchange. The investment sections of major banks have announced in recent weeks that they are no longer advising their private high net-worth individual clients to enter into CFDs because the risk for such products is too high in a falling stock market. Given that the almost entirely unregulated market in CFDs has been very profitable for certain Irish financial institutions, what in this Bill will make any difference for the future?

I listened to a household name, Nick Leeson, being interviewed on RTE yesterday. Mr. Leeson, who is now living happily in Ireland, is fronting Paddy Power's spread betting. That is probably a bit of fun but can the Minister tell me the difference between the spread betting advertised yesterday by Mr. Leeson and the CFDs which made up more than 50% of the volume of transactions on the Stock Exchange? It is neither here nor there if a high net-worth individual loses €15 million, particularly if he or she is one of the many who are tax free thanks to the Minister's kindness. However, it is a more important issue if financial instability is caused to the extent that ordinary people and businesses are squeezed by the cost of lending and the capacity for raising mortgages. I am delighted we are having a conversation about where our financial services sector with its ultra-light regulation is going.

The Minister will recall that I raised the issue of sub-prime lending on 22 November 2006 and on several other occasions over the past two years both on the floor of this House and in the Committee on Finance and the Public Service. In many poorer housing estates, sub-prime lenders are selling door-to-door and they distribute more advertisements than take away restaurants or pizza delivery companies in their efforts to persuade people to roll up their loans and re-mortgage their houses. The lenders speak about easy borrowing but make a fortune from the people they pressure into taking such loans. I asked whether the Minister was concerned about sub-prime lenders preying on vulnerable people and about the regulation of the sub-prime market and he replied that the sub-prime market was not really going to be regulated by the Financial Regulator because it was carefully excluded from his light regulation model and did not come under the terminology defining the authority. He said, however, that the practice was covered by the Consumer Credit Act 1995 and if I had concerns I should make a complaint. Given the wreckage of the international financial markets over the past few months, it was very arrogant of him to say that something which appeared so risky to those who were concerned about the prudential element of banking could be simply addressed through the 1995 Act.

He also stated:

the Financial Regulator has a consumer protection remit in the area of financial services. It was established as a modern regulatory authority that would perform its function in an independent fashion.

However, the Financial Regulator has had nothing to say about what has happened in the sub-prime market, which is estimated to be worth €1 billion in Ireland and, prior to the advent of the recent problems, was expected to grow to around €5 billion within the next few years. In comparison with the losses in Ormonde Quay and Saschen Bank, €1 billion sounds like small beer but it involves a large number of vulnerable people. In its two most mature markets, the USA and the UK, sub-prime lending has faced accusations of predatory practices. Research shows those who access the sub-prime market are more likely to be financially vulnerable and display little financial sophistication, underlining the need to protect them from predatory lenders. In the UK, practices have included cold-calling and loans have been granted to borrowers who have misled or lied on their application forms about their capacity to borrow. Has the Minister even made a phone call since the crisis occurred to find out the risks involved in pedalling sub-prime and 100% mortgages or to ask whether applicants may have lied about their repayment capacity? Even the chairman of the US Federal Reserve, Ben Bernanke, referred recently to the dubious practice of loans being granted to people who are unable to repay them. With regard to the Bill before us, is the Minister prepared to provide a more robust regulatory framework? The era of light regulation may not be in the best interest of the banking industry if it allows the sights we have seen of people queueing on the streets to get their money back from Northern Rock.

The Irish sub-prime market is dominated by new institutions specialising in the area. If one ever watches afternoon television or listens to the radio, one will be made constantly aware of advertisements for sub-prime type lending. Sub-prime loans are being arranged through a network of mortgage brokers, some of whom are very eager to sell products. There are over 1,800 mortgage intermediaries registered with the Financial Regulator in Ireland. The market stands at around €1 billion and was expected to grow to around €5 billion. Credit is becoming more expensive and more difficult to attain and some people may have been misled into borrowing or encouraged to lie in their financial loan applications. What will happen as interest rates rise and such people feel the squeeze and what does the Tánaiste and Minister for Finance, Deputy Brian Cowen, intend to do about it? He must strike a balance between protecting people from themselves and allowing them a choice.

What steps can be taken to make ill-informed borrowers think seriously before jumping into the clutches of a sub-prime lender? Is the turmoil in the United States sub-prime market contagious? It will prove contagious if regulation in Ireland is so weak that nobody calls lenders to account when clear risks are taken. There would, in turn, be an impact on the housing market. Going back to the Minister's previous comments, as non deposit taking lenders sub-prime lenders do not fall under the remit of the Financial Regulator. Is the Minister prepared to change this? Is he prepared to bring sub-prime lenders that, effectively, operate through UK offshoots or offshore under Irish regulation? This is important and people on all sides of this House with knowledge of financial markets will agree.

In terms of financial derivatives there is an issue relating to what brokers have been selling and, in this regard, I have questions on the Financial Regulator. Some stockbrokers in Ireland have been selling financial derivatives like hot cakes. Institutions such as credit unions have had lending activities restricted and have taken in a great deal of money due to SSIA savings. To what extent have such operators been exposed due to investments made in financial derivatives on foot of recommendations made by brokers? Some Irish brokers have done very well through this trade and I am concerned about credit unions. Such institutions should be well advised on the investments they make with regard to financial derivative products that may turn out to be risky.

The Minister said earlier that those providing these products make money not only on the interest but on the selling fees and once one rolls them up and sells them on one makes more fees. If one makes €1 billion in financial derivatives the key is to roll them up and sell them on. Do we know what the picture is like for the people and institutions, such as credit unions, left holding them?

The Minister for Health and Children, Deputy Mary Harney, would gasp if I said thank God for State banks but, thank God for state banks in Germany. Where would we be if the state banks in Germany, including the state bank that owned Ormond as it went to the wall, had not rescued the bank that went under as a consequence of the Ormond Quay investment vehicle? This was a classic example of an operation set up in Ireland to provide a vehicle for investment partly because the German economy is somewhat less buoyant than the economy here. People in Germany have a tradition of saving and banks are stuffed with money so they must find something to invest in. We have had a narrow escape.

The Bill seeks to raise penalties pertaining to reinsurance and the first bad press the Irish Financial Services Centre got related to Swiss Re and other reinsurance vehicles. Risks were taken and international parent companies were very unhappy upon examination of the risk profiling involved. Our financial services industry provides many important, well-paid jobs in this country and it is something we must look after. However, regulating in such a weak way leaves us open to damage to our reputation and, in the long term, will put the industry at risk. This is an issue that has attracted almost no discussion.

Has the Minister met the Governor of the Central Bank and the Financial Regulator with regard to what has happened in the markets recently? On the adjournment last week I raised the need for an enhanced depositors' protection scheme for savers and depositors in Irish financial institutions. In the case of Northern Rock the British Exchequer and the Bank of England stepped in to cover borrowings. Our scheme is limited to 90% of deposits with an upper limit of about €20,000 and this is out of line with other schemes operating in the UK and throughout the EU. Given the closeness of financial markets here and in the UK will the Minister use this Bill to bring forward a revised enhanced depositors' protection scheme?

People queued to withdraw their money from Northern Rock in the UK but part of the problem was that the institution is almost exclusively an online bank in Ireland. There are no real branches here that people can go to and, in the early stages of the crisis, it appears Northern Rock did not have adequate phone lines or e-mail services. It was very difficult for people to get in touch with the bank. Has the Minister given any thought to how such a situation can be avoided in future? He may, correctly, say there is very high liquidity in the Irish banking system but banking is built on confidence, trust and reputation. Once confidence, trust and reputation start to unravel there can be disproportionate punishment in an unforgiving world banking sector. With this in mind, has the Minister met the Governor of the Central Bank and the Financial Regulator?

In the debate leading up to the formation of the Financial Services Authority and the establishment of the regulator, the former Minister, Michael McDowell, who was then chairman of the Progressive Democrats Party, advocated in the original report in that regard that financial regulation should be located in the Department of Enterprise, Trade and Employment because it should be heavily consumer based. The Central Bank and the Department of Finance fought successfully like lions with the Minister's predecessor effectively saying "Push off, financial regulation is the territory of the Department of Finance and of the Central Bank". As a consequence, the trend in regard to the Central Bank and the Financial Services Regulator is for the sector to remain as secretive as the Central Bank has ever been in regard to banking issues, while assuring us that they are looking out continuously for the prudential aspect so there is no run on any commercial bank. They have said there is no problem but this is the first opportunity we have had to have a conversation with the Minister on economic matters.

As an economy, we are facing a year end budget deficit of €1 billion, €500 million more than the Minister forecast on budget day. The election is over and Fianna Fáil may well smile having got past the election. It raised spending levels on the current side to 13% but what will it do to meet the challenges it now faces? Will it just savagely cut frontline services in the way we heard of health service cutbacks, thereby reducing the number of doctors and nurses in Sligo General Hospital and other vital services in places like Waterford and Kilkenny? Will we witness a strategy of slash and burn economics by Fianna Fáil now that the budget deficit has turned out to be much worse and some of the construction industry bubble has burst?

What is the Minister's financial philosophy as we face into this more straitened period? Will ordinary people bear the burden of the cutbacks in terms of their health, education, local authority services or higher charges as in the case of the banks? Food outlets drop leaflets in people's front doors advertising take away pizzas and Indian meals and along with those leaflets fall others at an extraordinary rate peddling financial services and loans. The Minister decided to stand back from regulating that kind of activity. Will he reconsider his position and have regard for the interest of not only the masters of the universe in the banks who make lots of money on these products but for the impact of such activity down the road on the economy, the financial services sector, but more particularly on people trying to secure a mortgage to buy a house? With the credit crunch, those house buyers will find mortgage costs much higher in the future because the financial services sector binged and thought it could sell anything to anyone at any price. Those involved in that sector are laughing all the way to the bank. I would be very interested to hear the Minister's response.

Deputy Seán Ardagh

I am delighted to have this opportunity to contribute to the Bill which I welcome. I welcome in particular the main reason for its introduction which is to give a legislative basis to the fines and potential ten year prison sentence for people found to be in contravention of the markets in financial instruments directive, MiFID. I question the imposition of a fine of €10 million in that regard in this day and age. While I am aware it is a pan-European figure, when account is taken of the types of bonuses some people in security firms earn per year, €10 million, effectively, would not be a quarter of the bonus earned by the principals in one year. There is an opportunity in the legislation to review that figure in the future.

Deputy Burton stole my thunder, to some extent, in regard to CFDs because CFDs and financial spread betting is the item of the moment as such. It came to the fore for me on Sunday night when a constituent telephoned and, effectively, said that many people were being ripped off by the stockbrokering firms in Ireland marketing and selling CFDs in particular.

Like Deputy Bruton, I also listened to the radio and I heard Nick Leeson, formerly of Barings Bank, promoting paddypowertrader.com, a financial spread betting website. Being close to a number of punters, physically and otherwise, I decided to check the website. A pop-up screen on the website stated: "€100 Free — Jump Start your Trading" but the small print below it stated: "Just deposit €250 and place four trades by 14 October and we'll give you an extra €100 absolutely free".

I refer to a company called City Index Limited, which I will mention later because it is relevant in another context. On 23 March 2005 a press release issued from Anna Bradley, director of the Financial Services Authority, stating that the Financial Services Authority has fined City Index Ltd £35,000 for producing misleading financial promotions for spread betting and contracts for differences between certain dates. It stated that the firm was also fined for various failures in its systems. It communicated the financial promotions to the general public through daily national newspapers, magazines and on carrier bags used by selected sandwich shops. The promotional strategy had the potential to attract customers to high risk investments without adequately describing the promotions, the commitment required and the risks involved with spread betting and CFDs. This is a statement from the Financial Services Authority. It stated further that spread bets and CFDs are both high risk investment activities as if the position moves against the customer he or she can rapidly incur liabilities far in excess of the initial stake. It stated also that it is important that the financial promotions disclose that a customer's liability may exceed the customer's initial deposit or margin.

Another paragraph in the press release relevant to paddypowertrader.com states:

The FSA also found that a financial promotion communicated on carrier bags did not include a fair description of the nature of an investment offered by City Index. That promotion referred to a "free £25 bet". The bet was not "free" because of a requirement that a potential customer had first to place an initial spread bet through City Index in order to become entitled to the "free" bet. The customer could lose all, and potentially much more, of the customer's initial spread bet before becoming entitled to the "free" bet.

That is very similar to the situation that arose on paddypowertrader.com.

An Ceann Comhairle

It is a long way from the flapper meetings in Dingle.

Deputy Seán Ardagh

True. Paddy Power has moved up the ranks.

(Interruptions).

Deputy Seán Ardagh

A question arises about whether Paddy Power should be regulated by the Financial Services Regulator. I can understand that it was a Nick Leeson, tongue in cheek, bet; it was a punt, and it is a Paddy Power type affair, but when one considers that type of affair is being carried out by stockbrokering firms which put themselves forward as being the leaders of society, one wonders about it.

City Index was the company that was fined. I will not name it but there is a major stockbroking firm in Dublin that has become high profile in selling CFDs in the past few years. When one clicks on this stockbroking firm's CFD and financial spread betting web pages, one reads that City Index Limited, in association with the stockbroking firm, offers various spread bets and CFDs. Providing everything is kosher, and City Index has paid the fine and served its time, it and everyone can move on. However, looking further into the particular stockbroking firm I saw an example set out of what would happen in a case of spread betting or buying or trading in CFDs. The example shows the spread bet on a number of shares would be far more attractive than the money made on a share trade. Based on the figures used in the example, the return on the initial investment from trading conventional shares is 12.07%. This can be compared to the return of 121.25% using financial spread trading. However losses could be magnified in exactly the same way. I accept this warning is in the small print.

A similar calculation is made for CFDs. It shows that the return on an initial investment from trading conventional shares is 1.1%, which can be compared to a return of 24.1% using the firm's CFDs. There is no mention in this case of the possibility of increased losses. There is no example provided of what would happen if the shares go down instead of up, which has been happening over the past four months in the current bear market. There is a question to be asked with regard to how CFDs are being sold.

The constituent who phoned me the other night was very concerned about the vulnerability of private clients. I use the term private clients, but in England the financial services authority has what it calls intermediate clients. Intermediate clients are people where there is sufficient evidence to support a classification of intermediate customer. Such a person can reasonably demonstrate this and there is evidence that the person has appropriate experience and understanding with regard to the requirements set out in a code of practice. Also, the firms should retain and record the information by which they have come to assess a particular customer as being of intermediate status, the status at which CFDs can be sold to the person.

I am particularly concerned about people who fund their own pension, self-employed people who work hard and administer their own pension fund. We know that to buy an annuity to fund the pension of an ordinary backbencher in the Dáil would cost in excess of €1 million. Therefore, a fund of €700,000 or €800,000 would probably provide a self-employed proprietary director with a pension of €35,000 to €45,000, which is not excessive in today's terms. If this person has €300,000 of that fund in equities, we can imagine the target he makes for unscrupulous stockbrokers who see such a margin and profit in CFDs for themselves.

There was a very good article by Dominic Coyle in The Irish Times yesterday relating to CFDs. The article stated a director of the private banking section of a major bank here said its policy “was, and still is, that the risk on these products outweighed the potential return and we never recommended investment in such propositions”.

The article continued:

That may be so, but CFDs have certainly been big business for stockbrokers and the Irish Stock Exchange. It is somewhat ironic that one of the most aggressive sellers of CFDs in the Irish market has been [a company, in which the particular bank had a large stake until end-October 2006] . . .

If the money of the well-heeled clients of [that private banking sector] and other like-minded wealth managers has not been directed into such highly leveraged products, the question is whose has been. At the start of the summer, more than €1 billion of Irish investors' funds were resting in CFD contracts.

The suspicion is that many of those investing in CFDs should never have been dabbling in such exotic instruments. Either they themselves did not pay sufficient warning to the stark warnings in the small print or they were not sufficiently vetted.

This brings us back to the responsibility of stockbroking firms to classify customers properly so that only those who have the capacity, knowledge, experience and excess funds areinvolved.

On self-administered pension schemes, the Revenue has a set of rules which sets out what people can or cannot invest in. I contacted the Revenue yesterday to find out whether CFDs are acceptable and they are. Nothing has been put in place yet to stop this. These things take time. On the basis of CFDs being allowed, one would expect that the person with a self-administered pension scheme could also invest in paddypowertrader.com and do some spread betting, because there is no difference between the two. There is a need to examine whether people with self-administered pensions should invest in such high risk financial products and derivatives. When the Revenue set out what is allowed, the idea was to ensure prudence and that people would not get involved in high risk areas where their fund would be put at risk.

Last Sunday in the Sunday Independent, Senator Shane Ross wrote an excellent article on the issue of CFDs. He called a CFD a “casino for delinquents”. He said:

Irish stockbrokers love stuffing Irish punters into Irish companies. They often double as brokers to the same companies . . . CFDs are a stockbrokers paradise . . .

CFDs have nothing to do with investment. They are gambling chips. Borrowed gambling chips at that. Put very simply, you can borrow up to 90% of the cost of a stock and then bet the lot on it.

Brokers encouraged the madness. They raked in the commission; they charged the punters brokerage — not just on their 10%.

Therefore, if somebody put up €10,000 the brokers charged commission on the whole €100,000 at 0.5%. The investors were therefore charged €500 on their €10,000 to buy in and €500 to sell out. This is €1,000 commission on one €10,000 trade. The brokers only went for people who traded actively. Many people in stockbroking firms made a lot of money which is part of the reason their bonuses are so high. This system is all wrong.

A question must be asked with regard to the use of CFDs by companies in play and open to takeover. We have seen stocks in the Irish Continental Group being held by Cantor Fitzgerald for certain companies. This is perfectly kosher.

Debate adjourned.

Dáil Éireann díospóireacht - Tuesday, 2 Oct 2007