JOINT COMMITTEE ON EUROPEAN SCRUTINY díospóireacht -
Tuesday, 8 Dec 2009

EU Financial Supervisory and Regulatory Framework: Discussion.

Chairman

The final item on the agenda is a discussion of the draft legislation package for the reform of the EU financial supervisory and regulatory framework. On behalf of the joint committee, I welcome the following: Mr. William Beausang, assistant secretary, and Mr. John Moore from the Department of Finance; Mr. Mark Cassidy and Ms Rebecca Stuart from the Central Bank and Financial Services Authority of Ireland; Ms Breda Cassidy and Mr. Patrick Brady from the Office of the Financial Regulator; Mr. Pat Farrell and Ms Mary Doyle from the Irish Banking Federation; Mr. Brendan Kelly of Financial Services Ireland; and Ms Deirdre Somers, chief executive, and Ms Aileen O'Donoghue from the Irish Stock Exchange. Before we begin, I draw attention to the fact that members of the committee have absolute privilege, but this same privilege does not apply to witnesses appearing before the committee. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official by name or in such as a way as to make him or her identifiable.

We will hear a five-minute presentation by each of the bodies in attendance and when the presentations have been made, there will be a question and answer session with members. I call Mr. Beausang.

Mr. William Beausang

I thank the joint committee for giving us the opportunity to appear before it today to discuss the important proposals made by the European Commission. They aim to put in place a significantly enhanced EU supervisory structure for financial services to meet the challenges of effectively regulating and maintaining the stability of the Single Market and financial services in the European Union. They are a direct response to the report of the high level group on financial supervision in the Union, better known as the de Larosière report, published on 25 February this year. The report makes very significant recommendations on the future direction of financial regulation in the Union in the light of the lessons learned from the global financial crisis. It was the subject of extensive public debate and in June the European Council invited the Commission to make proposals based on the recommendations set down in the report. This suite of five proposals which were published on 25 September represents the Commission's response to the invitation from the Council.

The legislative proposals aim to create a strong and robust EU-wide system of financial supervision by developing a single rule book for financial regulation and securing close co-operation between national supervisors in the supervision of large, complex cross-border financial groups. They seek to establish a European systemic risk board, ESRB, to monitor and assess risks to the stability of the financial system as a whole, which involves so-called macro-prudential supervision. The ESRB which will receive secretarial and technical support from the ECB will provide an early warning of systemic risks that may be building up in the financial system and, where necessary, issue recommendations for action to deal with these risks.

A European system of financial supervisors for the supervision of individual financial institutions is also being established and will consist of a network of national financial supervisors working in tandem with the new European supervisory agencies created by the transformation of existing committees for the banking, securities and insurance and occupational pensions sectors. There will be a European banking authority, a European insurance and occupational pensions authority and a European securities and markets authority.

The ESRB will have the power to issue non-binding recommendations and warnings to member states, including national supervisors, and the European supervisory authorities, compliance with which will be monitored on the basis of a comply or explain mechanism. The heads of the ECB, national central banks and the European supervisory authorities, in addition to national supervisors, will participate in the ESRB.

The creation of the ESRB is in line with several international initiatives, including the creation of a financial stability board by the G20. The establishment of the ESRB addresses what has been identified as a major priority in strengthening financial regulation internationally by ensuring there is a strong focus on the stability of the overall financial system, alongside closely monitoring the soundness of individual financial institutions.

With regard to micro-supervision, there are three level three committees consisting of representatives of national supervisors in all EU member states, including the Committee of the European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Supervisors and the Committee of European Securities Regulators. These committees have advisory powers and aim to foster supervisory convergence, best practice and the convergence of regulatory outcomes, principally through the creation of non-legally binding guidance standards and recommendations. They also advise the European Commission on the preparation of implementation measures relating to EU financial services regulation. It is proposed that the new authorities will take over all the functions of these committees and have extra competences. These include: developing proposals for binding technical standards, respecting better regulation principles; resolving cases of disagreement between national supervisors where legislation requires them to co-operate or agree; contributing to ensuring the consistent application of all technical Community rules, including through peer reviews; the European securities and markets authority will exercise direct supervisory powers for credit-rating agencies in the European Union; and a co-ordination role in emergencies.

The Department of Finance has been a very positive supporter of these proposed reforms at Council working group discussions and contributed constructively to the development of the proposals. At national level, these issues were the subject of intensive consultation at the time of publication of the de Larosière report. The Department received largely positive feedback from stakeholders.

The current position is that EU Finance Ministers at the recent ECOFIN meeting on 2 December reached agreement on the proposals to establish the new supervisory authorities. This agreement follows from that reached at the October ECOFIN meeting on the ESRB. Both agreements now form the basis for the upcoming negotiations with the European Parliament as part of the co-decision process. It is likely that negotiations with the Parliament will continue until the middle of 2010. The European Commission hopes to have the new regime in place by the start of 2011.

The proposed new EU supervisory system is a very important element of the European Union's response to the international financial crisis. The committee will be aware from its consideration of other EU legislative proposals for financial services that these institutional changes are complemented by a broad range of important regulatory measures designed to address the main factors that contributed to the recent major disruption of the financial system.

Mr. Mark Cassidy

I thank the Chairman for the invitation to discuss the proposed new arrangements for EU financial supervision. My colleague from the Department of Finance has provided members with an overview of the new proposals, distinguishing between the proposed new arrangement for macro-prudential supervision, namely, the ESRB, and micro-prudential supervision which involves the European system of financial supervisors. I will focus on the proposals for macro-prudential supervision from the perspective of the Central Bank. My colleague, Mr. Pat Brady, head of insurance supervision at the Office of the Financial Regulator, will then discuss the micro-prudential proposals as they relate to the new supervisory agencies.

The current crisis has highlighted the integrated nature of the global financial system and the potential for risks to develop, not just at the level of individual institutions but also at systemic level. At European level, the Internal Market has resulted in a highly interconnected financial system where many institutions operate on a cross-border basis, often in several countries at once. The crisis has shown us that nationally focused macro-prudential surveillance is not sufficient to assess and address the risks and vulnerabilities that can develop at the level of the European financial system. One of the key failings leading to the crisis was that while key macro-prudential risks were identified accurately and commented on in various fora such as financial stability reports, there was no mechanism to ensure these risk assessments were translated into mitigating actions. The objective of the current proposals for the establishment of the ESRB is to provide a mechanism to assess and address vulnerabilities arising at the level of the European financial system.

These European developments are similar to initiatives being taken globally and domestically in Ireland. At global level, the Financial Stability Board, formerly the Financial Stability Forum, has been given an enhanced mandate by the G20 for assessing vulnerabilities in the global financial system and identifying and overseeing actions needed to address them. Domestically, the establishment of the new Central Bank of Ireland, which will be responsible for both financial stability and micro-prudential supervision, will allow macro-prudential risks and vulnerabilities to be addressed in a more effective and timely manner.

Turning to the composition of the ESRB, the general board will be the main decision-making body of the new organisation. Member states will be represented by both the governor of the national central bank, who will be a member with voting rights, and a representative of the competent national supervisory body who will be a member without voting rights.

The European Central Bank, the European Commission, the Economic and Financial Committee and the three proposed new European supervisory authorities of the ESFS will also be represented on the general board of the ESRB. The ESRB will include a high-level steering committee comprising 12 members of the general board to assist in the decision-making process by preparing the meetings of the general board, reviewing the documents to be discussed and monitoring the progress of the ESRB's work.

The work of the ESRB will be further supported by an advisory technical committee and a secretariat. The advisory technical committee will provide advice to the ESRB on technical issues and will be the main channel through which member states can provide input into the analysis presented at the general board, being largely comprised of representatives from national central banks and supervisory authorities. A secretariat will also support the work of the ESRB, providing the necessary analytical, statistical, administrative and logistical support, and a secretariat will be provided by the European Central Bank.

The role of the ECB in the ESRB is derived from a separate Council decision implementing Article 105(6) of the treaty to confer specific tasks relating to supervision upon the European Central Bank. This ECB role in the secretariat allows the new ESRB to exploit the ECB's well-developed macro-prudential expertise and its central role in the EU monetary system.

The ECB, in conjunction with national central banks, already collects and disseminates a wide range of data relating to the European financial system. Further, the ECB and the euro system already monitor cyclical and structural developments within the European financial system to assess possible vulnerabilities and resilience to potential shocks.

Developing a macro-prudential framework will be challenging for all bodies charged with macro-prudential supervision tasks, whether international or domestic. For the ESRB the principal tasks in this regard will be to identify and assess risks to systemic stability in the EU, to issue risk warnings where system risks are deemed to be significant and, if necessary, recommend specific remedial actions to address any identified risks. Warnings and recommendations can be addressed to the Community as a whole, a group of member states, an individual member state, one or more of the new European supervisory authorities, or one or more national supervisory authorities. They will not be issued to individual institutions. While the recommendations will not be legally binding, addressees are expected to act on them unless inaction can be adequately justified, a so-called "act or explain" basis. As a further step, the general board of the ESRB can decide case by case and after consulting the Council whether to make the recommendations public.

The Central Bank has strongly supported the proposals to establish the ESRB since the publication of the de Larosière report. For the ESRB to be effective, it is essential that it is a strong independent entity. While undoubtedly there are challenges facing the ESRB in this regard, we believe that such a body will be a significant step in addressing at a European level some of the weaknesses which contributed to the current crisis and in the mitigation of macro-prudential risks arising in the future. Further, we believe that the new domestic arrangements involving the integration and co-ordination of responsibilities for both financial stability and micro-prudential supervision will fit very well with the proposed new European framework.

Mr. Patrick Brady

I thank the committee for inviting me here today to discuss new proposals for a new supervisory regime in Europe. I shall try not to repeat what my colleague from the Department of Finance, Mr. William Beausang, has said in relation to the new supervisory structures, and my colleague, Mr. Mark Cassidy, has just covered issues as regards the new European Systemic Risk Board. For my part, I shall focus on the proposals for the three new supervisory agencies.

Supervisors welcome the proposals to establish the new institutional framework for financial supervision in Europe. In particular, we welcome the objectives of upgrading the quality and consistency of supervision, clearer focus on the oversight of cross-border groups and the aim of creating a single European rule book to underpin the proposals. In addition, we support the role afforded to supervisory authorities in the ESRB.

For supervisors, the proposals for the new authorities are not as radical as some may believe. Since the findings of the so-called committee of wise men, chaired by Baron Alexandre Lamfalussy, concerning the regulation of European securities markets in February 2001, there has been constant evolution in the approach to regulation and supervision across Europe, with the creation of the Committee of European Securities Regulators in June 2001, and the subsequent establishment of the Committee of European Banking Supervisors and the Committee of European Insurance and Occupational Pensions Supervisors in November 2003. The creation of the new authorities is a logical next step in the evolutionary process.

Over that same period there have been significant legislative developments covering the three committees, for example, the markets and financial instruments directive, the capital requirements directive and the so-called solvency 2 directive for insurers. The proposed European system of financial supervisors, ESFS, envisages transforming the existing level 3 committees of supervisors into new supervisory authorities for the banking, securities, insurance and occupational pensions sectors. The new authorities are to take over all of the functions of the current level 3 committees, including the issuance of non-binding guidelines and the ability to give advice on certain issues, in addition to the extra functions already outlined by Mr. Beausang.

The European system of financial supervisors will function as a network and comprise the new supervisory authorities, national authorities in the member states and a joint committee of European supervisory authorities to cover cross-sectoral issues such as financial conglomerates. Each authority is to be established on the basis of treaty Article 114 as a Community body responsible for contributing to the implementation of a process of harmonisation, and will comprise a board of supervisors, a management board, a chairperson and an executive director.

Within each authority the board of supervisors will be the main decision-making body. This board will, inter alia, be responsible for the adoption of binding technical standards, recommendations and decisions. Its membership will include the head of national authorities. Competent for supervision in each member state will be a member with voting rights in addition to representatives from the ESRB, the ECB, the European Commission and each of the other two authorities who will be non-voting members. A management board will be responsible for preparing the authority’s work programme, adopting the rules of procedure and playing a central role in the adoption of the authority’s budget. It will be composed of the authority’s chairperson, a representative of the Commission and six members elected by the board of supervisors from among its members. The members of the board of supervisors and the management board will act independently and objectively in the Community interest.

A single joint board of appeal is to be established for all three committees. Any national or legal person, including national supervisory authorities may appeal to this board against a decision by the authority seeking to apply the consistent application of Community rules, action in emergency situations and the settlement of disagreements between national supervisory authorities. To ensure the appropriate input of stakeholders into the decision-making process, a dedicated group will be created for each authority, with 30 members representing consumers and users of financial services, industry and financial sector employees.

Our assessment is that the establishment of the new supervisory authorities will mark a further evolutionary change in the structure of regulation in Europe. The scope for variation in the regulatory approach will narrow progressively and there will be a clear obligation to conform to practices and procedures adopted or recommended by the relevant authority. This can be seen in the broad range of powers envisaged. For example, two types of powers are envisaged to ensure a single set of harmonised rules. First, there is the power to propose binding technical rules in the areas specifically set out in the sectoral legislation. Second, there are powers to intervene in case of disagreement between national supervisors on matters where agreement is required regarding a cross-border situation, by mediating and adopting a binding decision, if necessary.

Regarding powers to bring about consistent application of EU rules, where a national supervisor breaches applicable or technical standards, an authority will be able to issue a recommendation to be made binding by the Commission formally in case of continued non-compliance. As a last resort, and as a basis for directly applicable Community rules, an authority could address a decision to an individual financial institution where national competent authority does not comply.

The authorities will expand the role of the current level three committees in ensuring a common supervisory culture and consistent supervisory practices and will also contribute to the functioning of colleges of supervisors, including by defining the information to be collected and distributed, in addition to managing a central database. The inclusion of staff of the authorities as observers in colleges of supervisors should lead to a more convergent and consistent approach to the regulation and supervision of cross-border groups.

Peer review analyses of national competent authorities will be conducted periodically. These peer reviews will cover issues such as the adequacy of resources and governance arrangements of the competent authority, with particular regard to the effective application of EU legislation and the capacity to respond to market developments; the degree of convergence reached in the application of EU law and in supervisory practice, including technical standards, guidelines and recommendations; and good practices developed by some competent authorities which might be of benefit for other competent authorities to adopt. Once an emergency has been determined in crises, the relevant authority is expected to co-ordinate the responses of national competent authorities. For example, it is envisaged that the independent decision making on short selling by national competent authorities in the last weeks of September 2008 will not recur but will be replaced by a co-ordinated process.

The authorities will also have powers to collect and manage micro-prudential information. Where information is not available or not made available in a timely fashion, an authority may collect this information directly from the relevant financial institutions. In line with the European Council conclusions in June which stressed that, without prejudice to the application of Community law and recognising the potential liabilities that may be involved for member states, decisions by the authorities relating to emergencies or binding mediation should not impinge on the fiscal responsibilities of member states, a safeguard clause is introduced. Where a member state considers a decision taken impinges on its fiscal responsibilities, it may notify the authority and the European Commission within one month of the authority’s decision that the decision will not be implemented. In its notification, the member state will have to explain clearly why and how the decision impinges on its fiscal responsibilities. In that case, the decision of the authority is suspended and a further process ensues.

The proposed framework for EU supervision can only work if the European Systemic Risk Board and the proposed European system of financial supervisors co-operate closely. The regulations specify procedures to be followed by the authorities to act upon recommendations of the European Systemic Risk Board and how the authorities should use their powers to ensure timely follow-up on recommendations.

The Financial Regulator shares the European Commission's aim to enhance the financial supervision architecture in the European Union. We have taken part in discussions at each of the level three committees on the proposals and at meetings of the level three chairs through our chairmanship of the Joint Committee on Financial Conglomerates. We are fully committed to playing an active and influential part in the future of European financial services supervision.

Mr. Pat Farrell

We represent the Irish Banking Federation and look after 75 retail banks and international banks in the IFSC. I address the joint committee from that perspective. I have provided it with a schematic presentation which sets out the structures of the ESRB and the supervisory framework. It will aid committee members in figuring out how the agencies interact with one another and the national supervisors.

We generally welcome the proposals because there is a strong international focus to the Irish banking system. I will concentrate primarily on the European Banking Authority, the agency involved in regulating our sector. The new framework is designed to strengthen macro-surveillance and micro-prudential supervision across the European Union. In the wake of the financial crisis, we are taking on board lessons learned and focusing on solutions that will mitigate these risks in the future. The expectation is that the structures will be in place by the latter half of 2010, although the European Parliament must review the proposals and will have its own input.

Micro-prudential co-ordination is designed to increase the effectiveness of institutional supervision, with a particular focus on cross-border groups. This will provide for much greater consistency for groups which operate across the European Union. This is important from Ireland's perspective because in respect of the IFSC, these activities are very important for Ireland and contribute much added value to the economy. The institutions of the IFSC contribute over one third of the service exports from the country. It is critically important that they have a credible and robust regulatory regime and that they operate within an internationally respected framework such as that designed to be delivered by these new structures.

A key objective of the new structures is to strengthen the link between the macro and micro elements. One of the lessons learned from the crisis is that there was not an interchange of information to a sufficient extent or there was not co-ordination between these two very important functions. This strengthening will also enhance supervisory co-ordination because we are increasingly looking at very complex internationally organised institutions with a global reach. It is not within the remit, competence or domain of a national supervisor to supervise such institutions on its own. The regulatory reach must extend across all the jurisdictions within which these institutions operate. That is why we are seeing so much debate on strengthening the global regulatory framework.

The other important matter is systemic risk. With the build up of risks that can sometimes happen in these institutions and which we saw so dramatically in Lehman Brothers, problems reverberate right across the globe. Therefore, we have to put in place very strong structures to monitor these emerging risks and take action before they create the catastrophic circumstances we saw at Lehman Brothers and elsewhere.

The framework provides for the integration of financial services with the real economy. We now recognise that a failure in the financial system can have such a traumatic impact on the real economy and the lives of people who work and live in these communities. It is vitally important to ensure the structures put in place will make sure there will not be a recurrence of these failures. The strength of these institutions will be measured by their independence because they must be able to call it as they see it when they see a systemic risk building in a particular institution or country. If they consider the institution is posing a threat, they need to be able to say so without fear or favour and to give directions on what needs to be done. There is a recognition for the first time that there is great inter-dependence between financial services and the real economy. This needs to be taken into account at European level by the European Systemic Risk Board. The focus on an early risk warning system is positive. The fiscal responsibilities of member states need to be separated from the actual responsibilities of the board.

There will be practical issues relating to the membership of the European Systemic Risk Board. Mention has been made of the different components and constituencies. There could be up to 60 people involved which would lead to unwieldy decision making and could make the board too bureaucratic. This will have to be watched. We will see how it works in practice as it begins to evolve.

The role of the new European Banking Authority is much stronger than that of the agencies which preceded it. It can be consulted but not overruled by the European Commission.

Another important development is the creation of a single rule book. We want to see a harmonised approach to regulation across all jurisdictions. This harmonised rule book will cover critical areas such as anti-money laundering, the capital requirements directive and so on. This will take time and require resources, but it is a process that is under way. The national supervisors in the new structure will retain their primary role, but if there are disagreements, the European Banking Authority will be able to intervene, with the important caveat that it can only do so where there are no fiscal implications for the member state concerned. Mediation procedures will be put in place where there are disagreements and if a disagreement persists, the authority will be empowered to settle the matter through the making of a decision. That is important because there must be a way to resolve these inevitable disputes. My colleague, Ms Deirdre Somers will speak authoritatively on the security and markets authority.

In summary, I will reflect on the parts of the process of most interest to Members. One of the most important things to watch out for is that the EU does not go too fast. I do not mean that we need to put a break on the process or pull our punches. I emphasise that this is all happening in a global context and the EU needs to ensure that it does not run ahead of other supervisory regimes, for example in the United States. Whatever happens, it must be evolutionary and take account of what happens in jurisdictions such as the United States. This is a requirement to be mindful of trade-off. There is a major debate on the need for higher levels of capital to be held by banks and higher levels of liquidity. Undoubtedly the levels of capital and liquidity buffers need to increase, but members need to understand that there are trade-offs. If we keep increasing the threshold in terms of the level of capital that banks will hold, then that capital will not be available to invest in businesses or in the real economy. At the end of the debate there must be a recognition of that trade off.

Another danger is that the fiscal sovereignty card might be overplayed. There has been a compromise in these current proposals, to a degree, between on the one hand all of Europe versus the United Kingdom. The UK has a very distinctive point of view because of the role of the City of London as the world's leading financial centre. The UK has been concerned to maintain as much autonomy as possible for the FSA and for the regulatory authorities in the United Kingdom. One of the caveats entered into this new process is that where a recommendation comes from any of these authorities if it is seen to have fiscal implications for the country concerned, they have an out on it. That is quite a broad caveat and it will be interesting to see how often that card gets played. If it is overplayed it could reduce and weaken the effect of these agencies.

Another area that members might want to reflect on is that it is adding another layer of complexity and that undoubtedly could result in more bureaucracy and make the decision making process unwieldy. Again we will see that only over the fullness of time. The industries concerned will be expected to fund these agencies because they will have a greatly expanded role and they have to service and look after in excess of more than 100 colleges of supervisors. Whether the industry or government will fund this, these agencies will have to be accountable to the national governments in terms of performance indicators and they will have to be able to demonstrate that they are meeting their objectives and that they are delivering value for money.

The time scale is quite ambitious for all of this to happen. While the authorities are targeting what will be up and running by 2010, it remains to be seen whether they will be able to acquire the expertise, the staff, the resourcing for the processes, the whole dynamic of constructing new relationships, managing their interactions with the national supervisors as this will take quite a deal of time. It will certainly not be a big bang approach. It will take quite a period to bed down and get to its optimal level of efficiency.

Mr. Brendan Kelly

Thank you for the invitation to talk to the committee about these important legislative proposals from the European Commission. I will try to keep my comments as brief as possible, because as I am the fifth in line, I can probably skip some ground that has been covered already. As the largest industry associated with the IFSC, FSI has taken a fairly keen interest in the development of these proposals over the past year. The proposal to establish the European Systemic Risk Board to strengthen macro-prudential oversight and the parallel proposals to establish three European authorities are the central plank of the European Union's package to reform and strengthen the regulation of financial services throughout Europe. Well respected and effective regulation is an essential precondition for the proper functioning of an internal market and financial services. The development of such a market is in turn essential to the competitiveness of the European economy and the effective functioning of the eurozone. To that end we fully support these proposals in that they address the shortcomings in the existing system of regulation that were exposed by the recent crisis, in particular the gaps that were seen to emerge between macro-economic policy and macro-prudential supervision, and macro-prudential supervision and the supervision of individual banks. The purpose of these proposals is to address these gaps and we are fairly confident that they do so. In so far as the systemic risk council will monitor and assess the potential threats to financial stability and will have regard to trends within the financial sector as a whole, it should provide that early warning system that was missing in the past.

Likewise the three new supervisory authorities will provide an important framework and ensure that the supervision of individual firms is consistent across Europe and it will have that co-ordinating role that was missing in the past to resolve crises.

Most importantly, these proposals strike the appropriate balance. There were more radical suggestions in the past which might have totally replaced national supervisors. It is important that these national supervisors have retained day-to-day responsibility for regulation. They have a particular insight and a familiarity with institutions and it is important that is not lost. As members are aware the IFSC is a very important part of the Irish economy, employing almost 30,000 people in 2008 and paying about €850 million in corporation tax. The IFSC is entirely dependent on the effective functioning of the single market of financial services. Passporting, as it is known, is one of the core building blocks of the industry. Based from Ireland, we have a wide range of different sectors now providing financial services to businesses and consumers throughout 27 different member states.

Based on an initial assessment of these proposals and some limited consultation with members we share the view expressed by the Minister for Finance that these proposals do not present any great threat to the future of the IFSC. At a very basic level, they should strengthen the single market and financial services and that can really be regarded as positive things for those involved in the Internal Market. We recognise that they mark a reorientation in terms of how financial supervision is conducted at EU level. Up to now, Europe has focused on harmonising existing regulatory standards and fostering bilateral relationships between national regulators. Under these new proposals, EU institutions and in particular those that have just been created will play a far stronger role in the process. That is quite important.

Some aspects of the proposals — we understand these are to be exercised in very limited circumstances — such as the power of the supervisory authorities to develop rules and standards that will be binding on national supervisory authorities, the power of supervisory authorities to intervene again in exceptional circumstances in the supervision of individual firms and the role of the supervisory authorities in resolving disputes between national supervisory in a cross-border context will beef up the role that these authorities will play. There is nothing in these that we should be concerned about at this level. It is very much a question of how we engage with those structures in the future. We would see a real need in light of these proposals for Ireland to significantly enhance the scale and effectiveness of our engagement with the EU on questions of financial supervision.

We happily acknowledge the superb work done by the Department of Finance, the Central Bank and the Financial Regulator in this area. In many areas the people we send out are rightly regarded as global experts in their field. When one considers the sheer scale of work that is likely to emerge, the point made about Europe not going too fast is particularly well taken. The scale of the legislative proposals anticipated to come down the tracks in the next couple of years would suggest that we will have a great deal of work and that some significant resourcing may be required simply to ensure that we are fully aware of the changes that have been made. Some of our members have expressed some concerns — I would not like to overstate them — about how these structures will operate outside the banking sphere. For obvious and understandable reasons the proposals are firmly focused on the systemic risks presented by the banking sector. The composition of the various systemic risk boards in particular reflects the importance of the banking sector to the European economy. Although I would not overstate them, there are some concerns about how insurance funds and asset management will fit into the structures. Most of these concerns are as much about the substantive package of measures as about the institutional reforms. Likewise, these are independent bodies that must remain independent. Accountability and transparency is extremely important. In that regard stakeholder panels are particularly useful in giving that level of accountability.

There is no guarantee that Ireland will be represented on them. There should be enough seats to go around but the selection of who will represent sectional interests is made at a European level. The directive refers to achieving geographical balance but it is something we must consider. I reiterate our support for these proposals. A robust and credible regulatory system is essential for financial services throughout Europe. The proposals have the potential to provide a very sound foundation for the industry in the future. They enjoy our full support.

Chairman

I thank Mr. Kelly. I invite Ms Deirdre Somers of the European Securities and Markets Authority to make a presentation.

Ms Deirdre Somers

I am delighted to be here. I will withstand the pressure of the previous five speakers and take my five minutes. I will concentrate on the securities part of the EU agenda. My colleagues have more than adequately covered the aspects related to banking. The markets are slightly different in that they have withstood the past two years well. The markets opened every day, gave good price information and managed unprecedented volatility. The considerations giving rise to the proposals for the new structure were different for the securities market than for the banking sector. I want to explain why the European Securities and Markets Authority is important for Ireland, what it will do and how we should respond to the new reality it presents for this country.

The first point is to understand why a market is important to any country. Most fundamentally, it delivers fundraising capability to Irish enterprise. It is an access point for foreign investment to Irish enterprise. What is less understood in the Irish consciousness is that the Irish Stock Exchange delivers considerable activity to the IFSC base. Some 24,000 bonds are listed on the Irish Stock Exchange in just under 8,000 funds. It is a supportive and embracing infrastructure for IFSC activity. It also provides the capability to trade all sorts of bonds, including Government bonds. It is a fundamental part of the financial services infrastructure and must be examined in the context of such a wide and embracing initiative. We must examine it carefully in this context.

The European Securities and Markets Authority seeks to improve the functioning of the Internal Market. It wants high, consistent and effective regulation to protect investors and depositors, to safeguard the stability of the financial system and to strengthen international supervisory co-operation. These are laudable, high-level objectives and to some extent reflect motherhood and apple pie in that no one could disagree with them. Given the background, where the securities market has been subject to a major amount of European harmonisation mechanisms over the past four or five years, my experience has been that the devil is in the detail and the execution. This is where we must concentrate our attention. The European Securities and Markets Authority has set itself the tasks of drafting technical standards to contribute to consistent application, to facilitate intra-jurisdiction delegation of tasks, to co-operate with the European systemic risk board analysis of peers and to monitor and access market developments. The price is a more harmonised, consistently regulated market that delivers better, more consistent investor protection, deeper liquidity, better pricing and, most importantly from the EU prospective, a body that will challenge US markets, particularly where Europe has traditionally not provided the same degree of liquidity or price multiples as the US markets.

I see this as a welcome add-on to the Baron Alexander Lamfalussy process mentioned earlier. In theory, this sounds fine but we are operating in a global world and global markets. Any European development, no matter how laudable, must take account of this and cannot be considered in isolation from international and global developments in the US in particular. One of the most welcome parts of what the European Securities Markets Authority will achieve is that there will not be a reoccurrence of the rather ad hoc approach to short selling bans we saw during this crisis. No one would consider the manner and method by which these bans were imposed as satisfactory.

The implications from a positive perspective are that we will have an overarching EU supervisory framework. It should be more focused and cohesive and should manage and identify systemwide risks with clearer and more timely enforcement. I share my colleagues' reservations about whether the size and scale of some of these committees might limit the ability to make quick and decisive action necessary in the middle of a crisis. Nevertheless, it is a positive development. The concern is that there will be another reduction in national autonomy and control. There is a risk of de-prioritising niche international activities. The interests of countries the size of Ireland can sometimes be lost in the politics, national agendas and focus on scale that is inevitable in initiatives of this nature. Harmonisation in financial services can lead to larger jurisdictions being seen as more in control of legislative policy agendas that influence their industries. International financial services activities can be wiped out in a single careless drafting. Unintended consequences must also be considered.

In reflecting on my contribution, I thought about the past five years. The securities market has seen almost ten new directives having a direct impact on markets and all with the aspiration of harmonising markets, bringing them together and delivering substantive benefits to issuers and investors. It is clear there were unintended consequences of those directives. Rather than centralising liquidity in trading, there was more fragmentation. Rather than increased price transparency, there is probably less price transparency than ever in European markets. Rather than benefiting all market participants, small and medium-sized companies have been virtually ignored in the harmonisation agenda. There is a large and growing lacuna in respect of investment in SMEs that has not been addressed. My concern is that these measures might increase this even further.

The problem with European legislation, measures and processes is that the interests of large countries and corporations will often be taken care of in the expanse of measures. Large countries are well-placed to ensure that the regulation works for them. Often smaller, niche activities are not well cared for. Often, initiatives taken to deal with particular problems can have an indirect and damaging effect lower down the food chain on activities that are neither culpable for the problems nor large enough to have a voice in their resolution. Ireland must respond to this reality.

I would welcome a debate on how to manage securities oversight having regard to this new reality. We need to have a very clear message of engagement with the EU legislative agenda and these new mechanisms. I am conscious that the UK has a veritable army of people tasked with this work. I do not think Ireland is in a position to replicate that army but we can be a little more clever in how we leverage the expertise and experience around us. These structures mean that we need to be very defined, well-managed and have better and more timely consultation than we have needed in the past. Having said that, we are all about harmonised markets as they deliver better investor protection and benefits to all issuers and companies if they are managed well. Therefore, these developments are very much to be welcomed.

Chairman

I thank Ms Somers. There is a very broad consensus of welcome for this in all contributions. I am always concerned when everybody welcomes something that there is a hitch somewhere. It is welcomed by the Irish Banking Federation, the Central Bank and Financial Services Authority of Ireland and even the Financial Regulator. With regard to subsidiarity and the level of control to be given to outside regulators, is the Department concerned about other changes that could be made by the European Parliament? Is it concerned about the concerns of the UK Government, given that the Irish economy is so linked to that of the UK and those concerns could have an impact? Does the Department consider that this new regulation will prevent from happening again the debacle and the crisis in regulating financial services that happened here? If so, how can we ensure that it will not?

Mr. William Beausang

On the Chairman's first question, the European Parliament has an important role to play in the negotiation process and that is entirely appropriate. It ensures even more democratic accountability for the development of the proposals for the new supervisory architecture. All members states are represented at the Council and in our experience all member states have an input and have been given an opportunity to contribute to the development of these proposals. In responding to the risk that is sometimes perceived and, to be fair, sometimes borne out in practice that large countries have greater influence in the development of regulatory policies, the establishment of these agencies with powers, standing and independence commensurate with what one wants to see in a regulator, with independence from the political process, is an important safeguard against the type of situations one could otherwise see unfold, where arrangements or agreements are concluded in a not entirely transparent way and where all member states do not have an opportunity to contribute. Looking at the roles of the supervisory agencies, the fact that the regulators of all member states will be involved in the governance of those organisations is an important protection for smaller member states.

Chairman

Mr. Farrell mentioned trade-offs on the level of cash in hand for banking and retail banking as distinct from financial services. Will there be a stipulation on trade-offs in Europe on the deposits held by banks with regard to inability or difficulties of businesses, despite the huge concerns of the NAMA debate, and the level of availability of funding to small companies? Will regulation put a stipulation on banks in Europe to have a certain trade-off cash depository on account?

Mr. William Beausang

That is to the forefront of everybody's mind as these proposals on capital ratios and liquidity arrangements are examined. We need a balanced approach, developing a model and methodology that safeguards the stability of the financial system and, where economic conditions are very negative, the financial system playing the role that each member state, including here, would want it to play to meet the needs of businesses and households. The Chairman mentioned the NAMA debate, and NAMA includes an important proposal to ensure a review of credit decisions made by financial institutions. To be fair to the financial sector — Mr. Farrell might like to comment on this — the financial system and banks here have made important commitments to meet the credit needs of the economy to help underpin economic recovery.

Chairman

Is there a danger that we could go from no regulation to over-regulation? The casualty could be the entire economy. The absence of regulation allowed the economies of Europe go into recession but we could respond with overkill.

Mr. William Beausang

There is always a temptation to get bogged down in terminology on whether we should adopt a more rules-based approach given that the problems, as they would be characterised, arose from a principles-led approach followed in many members states including Ireland. The message from these reforms is to achieve effective regulation that meets the objectives of all member states, primarily to safeguard financial stability but, alongside that, to also ensure a financial system that meets the needs of the economy and serves the needs of consumers, households and businesses, supporting and complementing economic activity rather than being, as it has been over the past year or so, a very destabilising and negative force in overall economic performance. The message is to move away from a situation with too much emphasis on the problems to which regulation can give rise and focus on regulation that works.

Mr. Pat Farrell

I wondered how long it would take us to get to NAMA. It is important to ensure that we do not over-correct when deciding what levels of capital banks need to hold in the future. Undoubtedly, they need to hold more capital and I cannot say with certainty — I am not sure anybody can at present — what is the right level of required capital. The argument has veered back and forth to some very high levels at the extreme. We all need to be mindful that there is a price to be paid for these things. Society may decide as a whole that it is a price that must be paid but we need to have balance.

To return to the fundamental question on the balance between national and international authorities for supervision and responsibility, it boils down to the fact that we live in a globalised world and we need a globalised financial system to support it. Nobody wants to move away from the many benefits of a globalised trading environment. As Mervyn King stated, large complex financial groups, such as large international banks, are international in life but national in death. When they get into trouble, the resolution has to happen within national borders. That cannot be sustained and if we maintain the globalised trading environment we must have a regime to supervise these large groups across borders. We also need crisis resolution regimes that can deal with the orderly wind-down of these institutions when and if they get into trouble. That is the issue we face and the proposal would move the focus from national regulation to the need to co-ordinate internationally. There has to be some trade-off of accountability, power and delegation; that is inevitable.

Deputy Joe Costello

I welcome all of the delegations. The discussion is fascinating. I was glad to hear that everybody supports the supervisory and regulatory proposals to a greater or lesser degree, with some caveats on over-regulation, over-supervision and the proposals being cumbersome and without sufficient flexibility. The opposite seemed to have been the case, with this country and many others not having light-touch regulation but non-existent regulation. We probably would not be in the situation we are now in if regulation had been given the importance it deserved. Have we any choice in the matter? There seems to be none other than the current one, namely, an EU-based macro and micro-prudential system. Is there an alternative? The marketplace is a global matter. Therefore, we need to consider cross-border regulation.

As some at this meeting have stated, it seems to be an evolutionary process and that, even had the markets not collapsed, we would have been heading in this direction because of the nature of the current markets. The situation was worsened because of the absence of internal national regulation. Many of the institutions present today were found lacking in this respect. Ireland and other member states must take action to protect their publics and economies, which is what this is all about. It must be done at micro and macro levels. This is the reality of the situation as I see it, but I would welcome the delegates' comments. There was some suggestion that we might be moving too fast, but this proposal is not likely to be in place until 2011. We are not going fast enough for many people and institutions who have been badly burned in Ireland and elsewhere in the EU.

The only purpose of having a banking system is the lending of money as part of an economic operation. If a financial system does not lend money, it has little function. However, the banking system seems to be seeking capitalisation without being in the process of lending into the economy. Guarantees and capitalisation have been given and money has been made available by the EU at a cheap rate, but the economy is crying out for credit. We must bring this down to the practicalities of the system. We are discussing a framework of supervision and regulation, but it forms a part of the broader public interest picture.

We are debating effective regulation, but what are our guests' opinions on the possibility of putting a broader regulatory structure in place? Are there dangers in having an EU regulatory structure in place vis-à-vis countries that do not have a similar structure? Might this be a plus, in that third countries would view the EU as having a credible regulatory system in which their money and investments would be safe? What are the implications for foreign direct investment, FDI, in Ireland? We have more FDI per capita than any other country and, by and large, that investment comes from outside the EU.

Deputy Seán Connick

I welcome the deputations and thank them for their presentations. They seem to welcome the regulations broadly, as no one appears to have a significant issue with them. However, I am somewhat concerned by the way in which the EU dealt with the financial crisis as it unfolded in the past year. It was slow to react, although I am unsure of the deputations' views in this respect. We ended up with a disjointed reaction from various countries. Governments waded in and, in some cases, nationalised institutions. We are going with the NAMA proposal. What are the deputations' opinions on closer co-operation?

Also of concern is the timeframe of two years. Much has been said by various contributors to the effect that implementation could take 12 months, 18 months or two years. Does the timeframe for putting the regulations in place account for the small and medium-sized enterprise, SME, sector?

I am critical of the speed at which the European Central Bank, ECB, moved as the scene unfolded during the end of 2008 and start of 2009. Would the deputations comment on this matter?

I welcome and have no difficulty with the creation of a single rule book, but are we at risk of paralysis with analysis? If overregulation develops, surviving could be difficult for small businesses. This will have an impact on ensuring the safe flow of funds into the real economy, not the financial sector.

Regarding the subsidiarity and proportionality checks, Ireland is a small open economy and, in many ways, differs from our European partners. I am concerned about the risk of being disadvantaged or, to some degree, bullied, given that our small population will be competing with the likes of France and Germany which have massive populations and economies that work at a different level than ours. Is there an inherent risk?

We discussed the EU not running ahead of the US. In terms of regulatory authorities, is the competitive route — US versus EU — the right one to take or would we be better off working more closely and in a uniform fashion? I ask this question in light of the recent news from Dubai and other countries outside the US and the EU. Will one of our guests address the question of closer co-operation between the US and EU?

The world economy is 24/7, but the Stock Exchange still works on an 8 a.m. to 5 p.m. basis. When one market closes, the US opens in the afternoon, followed by Tokyo and so on. Will all countries move to a 24-seven operation? If not, would such an operation be advantageous to Ireland, given our geographic position and our attempt to stay on top of the types of fast movements in investments, speculation and the short selling that occurred in the past 18 months or so? I would be interested in the deputations' comments on the Stock Exchange.

Chairman

Does Mr. Cassidy wish to answer the points raised by Deputies Costello and Connick? Anyone can speak.

Mr. Mark Cassidy

I will address Deputy Connick's point relating to the role of the ECB. We can distinguish between the ECB's primary objective of ensuring price stability and its role in the international money markets. It is generally acknowledged that the ECB acted quickly and comprehensively in injecting additional liquidity into euro area money markets, including emergency standard and non-standard monetary policy measures. It is also generally acknowledged that, in terms of the functioning of money markets, a key element in the original financial crisis, the ECB was effective.

In terms of the broader level, it is generally acknowledged that, while central banks, the ECB and other international institutions, such as the IMF and BIS, identified the build-up of systemic risks within the EU during the period leading up to the financial crisis, few anticipated the scale and depth of the crisis to emerge. Risk warnings were not translated into remedial policy actions. The new measures are designed to improve this part of the process.

The ECB has been a strong supporter of the movement towards a European systemic risk board, ESRB and will play a key role in the board. It is natural for central banks and the ECB in particular to assume a central role, since the ECB already undertakes macro-prudential assessments. It has a mandate to ensure financial stability within the eurozone. It also has extensive involvement in financial markets and with payment institutions and collects and disseminates monetary and financial data. It is generally acknowledged there was a gap between the supervisory side and the assessment of systemic risk and translating it into action. I believe this to be the function of the European Systemic Risk Board, ESRB, but we need to distinguish clearly between it and the primary function of the European Central Bank which relates to price stability in the eurozone. That was the objective of the ECB's monetary policy and the emergency liquidity measures it took in the past 18 months which are generally acknowledged to have been successful in their effect on international money markets.

Chairman

Deputy Costello has to attend another meeting. Does Mr. Brady wish to deal with his points?

Mr. Patrick Brady

Deputy Costello asked if there was an alternative to what we were proposing. Frankly, the answer is no, there is not. I shall tie that to the last point he made about having a broader regulatory structure or a single European supervisor. We must be careful that we do not blow this out of all proportion. For example, there are only 122 cross-border insurance groups in Europe, although there are about 5,000 insurance companies. Equally, there are 46 cross-border banking groups as against thousands of banks. There are 64 financial conglomerates in Europe. These may control 60% of the European market, but they are doing business against domestic institutions which only operate domestically. The concept of a single European supervisor is some distance away from being considered.

Deputy Costello also asked whether we were going too fast, while Deputy Connick mentioned a two-year timeframe. As these measures will be in place in January 2011, it is not as if there will be a massive gap in the meantime. The committees are in existence and working on colleges of supervisors, peer reviews and so forth. The work has started. Clearly, the formal structures will not be in place until 2011, but it will happen.

Are we over-regulated with regard to the single rule book, or is there a fear of being over-regulated? Perhaps I should have said this at the start, but when we talk about binding technical measures, these do not and cannot relate to policy issues. Binding technical rules can be introduced only where there is an operational decision to be made as to what should be applied; they cannot impact on national policy or decisions which, rightly, fall to be made within the political framework.

Was the EU slow to act and was it disjointed? The answer to both questions is yes. That is why we are where we are.

I shall offer one final comment about the constant references to global matters. We have to be careful that we do not do anything because nobody else is doing anything or feel we must wait on the United States or the United Arab Emirates. We must sort out issues at a European level in so far as we can. There are massive interconnections throughout the global financial market that might relate even to institutions which do not operate in Europe as regulated entities but which sell instruments to Europe. We can only really control the 120 insuring institutions I mentioned. Clearly, we must be alert to what is happening globally in order that we do not create a regulatory structure that makes Europe totally and utterly anti-competitive. That is not the aim of any of these structures. On the contrary, I suggest they will make Europe even more competitive.

There was a final question concerning subsidiarity and whether we were being bullied by the larger states. We have one of the most open economies in the world. We have a financial services centre of renown in Europe which operates across the globe and is a huge contributor to the economy. So far we have not been bullied and, frankly, that is something I do not believe we would tolerate.

Deputy Seán Connick

Of course not.

Mr. Pat Farrell

Some of the presenters constructed their presentation on questions such as, "Why we are doing this?" That is a good way to look at the matter because this must be done for a purpose, for the greater good, as it clearly is because there is only one alternative, namely, to shrink our economic activity and financial systems back to national borders which clearly would be unthinkable. The State is just over 75 years young and until the early 1960s we never hit our economic stride because we had a narrow view of economic activity. With a population of only 4,500,000, we cannot generate what huge domestic economies such as France and Germany can, as referred to by some speakers. We have to have an international outlook and be export oriented. For some time successive Governments have accepted this as a sine qua non.

For that system to function, we must commit ourselves unambiguously and without caveat to a globalised system of trade with a globalised financial system to support it. That requires that we have a regulatory system mapped onto it. If we do not, there will be a retreat to national borders. An unhappy outcome, although we obviously like to think it is short-term, of the meltdown in the financial system was that national governments had to take action because there was no cross-border resolutions system to respond to the crisis in individual countries. There were some inelegant solutions to dealing with some of the bail-outs required in banks that were operating cross border. That created many issues because the textbook question had never been set or answered. It was new territory. We are wise about these issues in retrospection, but they must be resolved. We certainly must have a much more co-ordinated and strengthened supervisory framework.

Likewise on the systemic risk side, one would like to think, mapping backwards, with regard to what happened here and in other countries, that a fully functional systemic risk board would have signalled the start of an asset price bubble in this country and that would have called us to account at a particular point. The situation is similar in eastern Europe when one considers the problems these countries have with the amount of debt denominated in foreign currencies now creating huge problems. That is another systemic risk that a body such as the European Systemic Risk Board, with its surveillance systems, might have monitored and identified as a threat and in respect of which it would have directed the authorities involved to take action. Much of this is retrospect, but it is about learning from the mistakes of the past and constructing a better way of doing things in the future.

Chairman

There was a question on foreign direct investment. The financial services centre, where 30,000 people were employed, is quite different from the retail banking sector. Do the delegates distinguish the difference? Did the financial crisis impact differently on financial services which are globally based?

Mr. Brendan Kelly

With regard to the IFSC and its performance during the past 18 months, at a very high level employment numbers have held up reasonably well and most of the companies which operate here continue to trade and do quite well. That can mask to a point some of the trauma and disturbance under the surface. Business units within certain firms have moved location to be replaced by others in some cases, although not in others. It is a sector of the economy that requires constant care and attention if it is to continue to make a contribution as it has in the past. In terms of the regulatory environment, it is clear that what is required to attract international financial services to Ireland is a well respected international regulator who would be well attuned to trends in the international sector. We have been very lucky over a long period to have had this and we are confident that, within the context of these proposals and others, we can continue to attract financial services investment.

The point is well made. If Europe attempts to marginalise itself within the global financial system, a financial services centre in Dublin or anywhere else begins to become difficult to sustain. I do not think it is a question of dragging our heels or not moving until somebody else moves, but having regard to the over-arching principles laid down by the G8 and the G20 which have informed these proposals and which also inform the US proposals, we must work in lock-step with other major trading blocs which have sophisticated financial systems to ensure we do not end up with radically divergent capital standards, accounting standards or business models for financial services.

Regarding the political imperative, the point is well made that this is ultimately about protecting people and consumers. That is as potent in the United States as it is in Europe and is an important driver. There should be no reason Europe, the USA and other states cannot work collectively to develop standards.

I was unsure from Deputy Costello's question whether the point he was getting at related to FDI, foreign direct investment, in international financial services or broader FDI.

Chairman

It was both.

Mr. Brendan Kelly

The Deputy has a point and it has been picked up. The health and vitality of the banking system is one of the factors that influences our competitiveness. Foreign companies seeking to invest in Ireland will look to the level of choice in the banking market here in terms of partners and so on. It is very important for the broader FDI sector that our challenges in the banking area are addressed rapidly.

Chairman

Does Ms Somers wish to comment on Deputy Connick's point on the exchange?

Ms Deirdre Somers

It is an interesting question and not one that I have heard often. I wish to clarify one thing. Nine to five does not exist in the Irish Stock Exchange.

Deputy Timmy Dooley

Deputy Connick is too busy here and is not able to trade his stocks on behalf of the constituents of Wexford.

Ms Deirdre Somers

The opening auction on the Stock Exchange starts at 7.30 a.m. and the closing auction finishes at 6.30 p.m. so it is not nine to five. It is an interesting question but it is important to distinguish between institutional and retail shareholders. Institutional shareholders have access to 24 hour trading on any stock and that is the way in which the globalised markets have operated. As for the retail market, the question one needs to put is whether there would be a market or demand for 24 hour trading from a retail base and whether there is sufficient scale in the domestic Irish market to justify such a resource.

Full 24 hour trading has become the trend, especially within the European landscape. This has led to several international alliances especially between European and US stock exchanges. There are many reasons for these alliances but one is to provide for longer and more connected trading days. The reality from an Irish Stock Exchange perspective is that if smaller exchanges become part of these alliances, it is their end. Lisbon is a good example. It became part of the Euronext, a more globalised exchange aligned with the NYSE, New York Stock Exchange. Lisbon had a scale similar to the Irish Stock Exchange, the same number of issuers and the same delivery to a domestic market. However, within three years the tumbleweeds were rolling around the streets where the stock exchange used to be. That is the spectre of alliances for smaller countries. They become absorbed and the centrifugal force or hub of activity that surrounds an exchange moves to the centre, something the executive of the exchange is committed to prevent taking place in Ireland.

As for Irish enterprise, companies with the scale to attract the number of investors necessary to sustain 24 hour trading normally have control over the matter. The larger companies on the Irish Stock Exchange have listings on other markets where they have significant amounts of shareholders who wish to trade the stocks at particular points during a given day. I do not see the demand or the economic benefit of expanding the trading day for the moment, especially in the case of the Irish domestic market, but perhaps if there were an opportunity to examine other asset classes beyond Irish cash equities that would be a happy day from our perspective.

Deputy Timmy Dooley

I will be brief because much of the ground has been covered. I welcome the presentation and the very helpful information provided. There appears to be a consensus that we must do this from a European perspective but that we must be connected to the outside world as well. Perhaps the G20 is the forum at which much of the effort should take place. Clearly we are playing catch up and much of what has been identified as a problem in Ireland in the past 12 to 18 months appears to rest on light or poor regulation or lack of control within the regulatory regime. Ultimately, the market sought to regulate our financial system through the credit crunch and the lack of available funding on international markets and it brought us to our senses to a large extent. Ultimately, the market regulates itself in the context of individual states that, for one reason or another, have gone ahead of the market or fallen behind. I am unsure whether this system or any system currently proposed seeks to resolve a concern I hold which relates to the globalisation discussion on which several of the delegation concentrated their remarks. A difficulty is posed where there is considerable innovation within the financial system and one must regulate the system in place.

International globalised companies seek to create a competitive advantage and to get ahead of their competitors. They are always going to push the envelope one creates for them. For this reason there should be a fundamental examination of the overall architecture of the financial system. One could leave matters to the market, which is fine, but given competitive constraints each company will try to maximise to the greatest extent possible its potential to make profits for shareholders and will push that envelope risk to the greatest extent. This is where the problem lies, as I see it. We often forget the significant shock the collapse of Lehman Brothers had on the entire global financial system. Should we look beyond regulating, observing and seeking to control what is in place? Should we take a more proactive role in the design, compilation and operation of the global financial system or the architecture of that system?

Mr. Patrick Brady

Yes. Deputy Dooley is absolutely correct and we are doing that. The Deputy is correct to say people will always seek to push the envelope in terms of how they can get an advantage on competitors. There is a need for some of the issues to be discussed globally, for example the possibility of central clearing houses for derivatives. Some people have even raised the possibility of banning over-the-counter derivatives. I am unsure whether that would be a good thing because they serve a purpose if they are used for hedging rather than for trading.

There has been discussion of the possibility of special global resolution regimes and the concept of living wills for financial institutions. Mr. Farrell mentioned burden sharing not only between member states within Europe but global burden sharing. There is no question but that these issues are being examined. Let us consider the matter as phased. Globally we are in a containment phase at the moment. After this, we must go through a resolution phase and then we will move to a prevention phase. The matter is being examined and the committee can expect to see something on it in future.

Mr. Pat Farrell

The Deputy is correct to refer to the need to focus on innovation. The lifeblood of industry is innovation. There is a constant challenge for regulators and the authorities to match it in terms of regulatory resources. Sometimes this can lead to a dangerous debate about whether the concept of innovation is bad. I suggest this is not the correct place to be because not all innovation is bad. We can see from the troubles that beset the system that a degree of innovation made a vast contribution to the meltdown of the system. Products were developed which were so opaque and lacking in transparency that even the people who created and managed them did not fully understand the products or the risks associated with them.

Let us consider a simple product with which we are all familiar, such as a fixed rate mortgage. Behind every fixed rate mortgage stands a derivative. Should we withdraw such innovation? That would involve withdrawing a very important product in the retail environment that offers choice and value to people. We must be careful about that.

I refer to how we deal with risk in the system. For the moment all institutions, whether investment banks or otherwise, are considerably de-risking and their behaviours are very risk averse compared with the past. However, we must get beyond that and deal with the issues to prevent a recurrence.

As Mr. Brady mentioned, the Governor of the Central Bank stated there are fashions in regulations, one of which is living wills. Another is narrow banks, that is, separating the utility function of the bank from the investment bank side. None of them hold a panacea or pill to solve all the problems. In the future one will see that the riskier the endeavours in which institutions are involved, the higher the levels of capital they will be required to hold and the more intrusive the regulatory regime will be. In a sense, the system will have to make choices for itself. There will be a price to be paid and a trade-off. If one is involved in very high-risk investment banking-type levels of activity, it will require higher levels of capital and, in other cases, higher levels of liquidity. The regulatory regime will be more intrusive.

One lesson we have learned is that considerable areas of the financial system engaged in very risky behaviour and were, in effect, in a shadow system and were outside the realms of regulation. Mr. Brady mentioned that there will be a direct response to that through the structure we are discussing today, namely, that the new system will, at European level, for the first time have the authority to directly regulate the credit rating agencies which played a part in this issue. That is one example of how the new regulatory structure will for the first time bring a set of actors, who have a crucial role to play in this area, inside the regulatory fold.

Chairman

With regard to life cover and mortgage protection, it has come to my knowledge that many people do not have life cover. Is that situation currently being dealt with by financial institutions? I refer to situations where loans were provided by banks who did not insist on people taking out life cover and where re-evaluations may currently be taking place. Is Mr. Brady aware of that issue?

Mr. Patrick Brady

I am not. Part of the risk mitigation the banks had in place when providing mortgages was to require the borrower to get life cover.

Chairman

Perhaps that was the case when it came to the family home. If a property was rented out the stipulation to have life cover was not as great. It is now emerging as a major problem for people now seeking life cover, in light of re-evaluations by banks and clients in order to safeguard loans in the future. Perhaps Mr. Farrell might comment on this issue. It was brought to my attention that in recent times people had huge levels of debt but had no life cover whatsoever. They may have mortgage protection on their family homes but have no life cover in place for other investments.

Mr. Patrick Brady

That would be a concern from a protection perspective. If one decides to expose oneself to a high level of borrowing one should have cover in place. I am not aware that life cover is being refused by any insurance companies.

Chairman

No, but clearly it was not encouraged by financial institutions until now. The lack of regulation of the industry in Ireland meant that a major amount of money was extended to people without life cover just to get business. It is now a concern for many people who are seeking cover.

Mr. Patrick Brady

I am not aware of the situation but if the Chairman provides details I will come back to him.

Mr. Pat Farrell

It is long-established practice that when somebody is seeking a mortgage for his or her principle private residence, he or she is required to have life cover in place, something which is required by all financial institutions. There are some caveats to that practice. If somebody is over 55, for example, I understand the requirement can be waived. It can also be waived where a person, because of an underlying medical condition, is not in a position to get cover and would be, by default, barred from taking out a loan.

The Chairman referred to residential investment properties. It has been a long-established tradition that somebody who is taking out a loan on such property is not required to get life cover because the level of risk and exposure involved is completely different. Life cover is required in the case of a principle private residence because such situations, in many cases, involve a family and it is important that in the event of the death of the person who has borrowed the money there is sufficient cover to clear the loan and that somebody does not find himself or herself without cover. A residential investment property is a completely different situation.

Chairman

At the moment there is a bigger concern, in light of the devaluation of properties, the huge indebtedness and the fact that properties cannot be sold.

Mr. Pat Farrell

Yes, there has been a fall in values. It is a long-established and accepted tradition across the system that life insurance was not required when taking out a residential investment loan.

Chairman

I have two final questions. With regard to the broad principles of the rule book, will issues such as the capping of bonuses be included? I have no doubt it will contain hundreds of pages. What involvement will financial institutions operating in the State have with the important bodies concerned? What will be the role of the European Insurance and Occupational Pensions Authority? In light of the major insurance and pension devaluations, have the current status of pensions, the future indebtedness of people and the amount of money they have lost on pension plans in the State been assessed? Many bodies are currently in situ. What information has been gleaned regarding the similarities between Ireland and Europe in terms of the loss of pensions? I would also like information on the rule book.

Mr. Patrick Brady

The Chairman's question on remuneration policies and the rule book is very good because it brings me back to the distinction I discussed earlier, namely, that supervisors can only introduce binding technical standards where matters of policy are not concerned. Clearly, remuneration policy within a particular banking sector would be a political issue and not one for supervisors to decide upon. I do not see remuneration policy as being covered by a single rule book.

Chairman

That concerns banks controlled by the State. Banks which are not controlled by the State would not be affected by political involvement.

Mr. Patrick Brady

They would because they are located in the jurisdiction and it is for the jurisdiction to decide what remuneration policy should be.

Chairman

A privately owned bank has no commitment to the payment of the chief executive officer of a bank.

Mr. Patrick Brady

No. Today I understand the Chancellor of the Exchequer in the United Kingdom is expected to make a statement on the payment of bonuses in the banking system, including private banks. Remuneration policies are a matter outside the direct supervisory sphere one would expect to see in a single rule book. The commission published recommendations on remuneration policy and consultation is taking place domestically.

I cannot answer for the pensions sector because we do not regulate pensions. The Pensions Board does that. On insurance, we are conducting a stress-testing exercise with insurers, which is happening at a European and global level to determine the state of insurance companies in the current and future recessionary environments.

Chairman

Does the Office of the Financial Regulator regulate pensions?

Mr. Patrick Brady

No.

Chairman

If one body was set up, would there be joint representation on it?

Mr. Patrick Brady

Yes.

Chairman

Will there be any dialogue with its primary officers regarding pensions? The issue is linked.

Mr. Patrick Brady

I agree. As I said, the Pensions Board is responsible for regulating pensions in this jurisdiction. I did not want to go into detail on a European level, but as the Chairman will recall, I said there is a stakeholder group for each committee. The insurance and occupational pensions committee will have two stakeholder groups, one concerned with occupational pensions issues and the other concerned with insurance issues.

Chairman

Is there any point of precedence in the rule book for developing a ten-point plan for banking in Europe for better regulation? Does Mr. Brady envisage the development of a rule book which would be a bible for banking and good governance across Europe?

Mr. Patrick Brady

Yes, that is already emerging. Recommendations have been made by the existing committees and it will be more common in the future.

Chairman

Is it possible to see the information on some of the guiding principles of the rule book before we furnish the final report?

Mr. Patrick Brady

I cannot give the Chairman information on what the guiding principles of the rule book will be but I can reference some guiding principles which committees have already issued, such as the role of colleges and the lead supervisor. They are policy formulating recommendations from the committees.

Mr. Pat Farrell

With regard to remuneration, the authorities have and will continue to have considerable influence over the remuneration policies of the financial institutions. In this jurisdiction the Government made a decision about remuneration in the case of the guaranteed banks. The governor said — I echo his remarks — it is probably not sustainable over the longer term because we live in a globalised market and, therefore, salaries have to be set at a level which can attract people globally.

On remuneration generally, authorities have considerable influence and sanction. If institutions set remuneration policies and very high bonuses that promote risky behaviour, there will a price to be paid and those institutions will be required, in terms of the capital they hold and the levels of regulation with which they must deal, to have regard to this when setting remuneration policy. There is a general acknowledgement across the industry that we need to align remuneration and incentives with the development of business and banking models that are sustainable in the long term. There must be a move away from an emphasis on short-term results and profits.

Chairman

I know this will not happen until 2011, but in view of the critical period ahead for the banking sector in the next 12 to 18 months, will there be an impasse in the imposition of this overall European regulation from the point of view of the real economy, as mentioned by another Deputy? The urgency attached to NAMA was alluded to initially. I know from talking to people in the real world that many are encountering difficulties. The effectiveness and discretion of the Department are important. A comment was made by a banker at a meeting here last week that the money would initially trickle down to businesses. The whole aim of NAMA was to encourage enterprise and support viable, profitable businesses, but there are also businesses which are viable and have no cashflow. Is there a clear understanding of the obligation of the financial institutions to assess viability in a different light?

Mr. William Beausang

The financial institutions which have been supported by the Government through the guarantee, the recapitalisation, the NAMA initiative and the revised guarantee scheme recently approved by the Oireachtas fully understand the primary interest of the State in supporting the financial system is to ensure it, in turn, can support economic activity and meet the lending needs of the economy.

A significant amount of work has been done with the financial institutions. An independent report has been commissioned by the Minister to consider the issue of credit availability and there have been a number of important initiatives, including a clearing group to consider issues that have arisen in particular sectors in terms of credit availability. As I mentioned, there is provision in the National Asset Management Agency Bill for the setting up of a review process which will be chaired by an authoritative figure to ensure there is a second pair of eyes considering credit decisions which are affecting fundamentally viable businesses. Obviously, there is major emphasis on ensuring there is reciprocation on the part of the financial sector for the support provided by the State to ensure the underpinning of economy recovery.

Chairman

The regional distribution of funding is important, as some accounts can be reloaned. I refer to the ability of the financial institutions to ensure a regional balance to the distribution of investment. This is important for small companies throughout the country. I do not know whether the Minister can accommodate this, but there should be a balance.

Mr. William Beausang

As the Chairman knows, the banks have extensive regional networks and divisions and operate on a regional basis. I am sure within the institutions there is a sharp focus on ensuring balance in their lending decisions, taking into account local market conditions which are obviously of fundamental importance to the institution concerned.

The other point I want to make is with regard to the pace with which this initiative has been introduced. The speed with which these proposals have been brought to this advanced point is remarkable in European terms. The de Larosière report was published only at the end of February and the Commission made its proposal at the end of September, yet we are now at a point at which detailed proposals are being sent to the European Parliament for its consideration and the European Council will be encouraging the Parliament to adopt the proposals as quickly as possible in order that the new system can become operational during 2010. Considering the history of previous proposals for a more joined-up system of financial supervision in the European Union, the speed at which these proposals have been dealt with certainly stands up to scrutiny.

Chairman

I thank our guests for their presentation and detailed and comprehensive answers to our questions. It has been an informative meeting. It would greatly assist the committee if there was any documentation with which the representatives could furnish the committee in the next two weeks. If there are areas they believe were not covered or is an issue they wish to see included in the report, I ask them to inform us of this.

The joint committee adjourned at 2.15 p.m. until noon on Tuesday, 15 December 2009.