Scrutiny of European Union proposals will entail a briefing by the Department of Finance on proposals regarding the commercial exploitation of public sector documents. We will first hear from the Department of Finance officials and then proceed to a question and answer session with the members. We can then decide what course of action to take. Is that agreed?
Scrutiny of EU Proposals.
When is it proposed to deal with correspondence?
Under any other business.
On a point of information, Chairman, I wrote you a detailed letter regarding the Freedom of Information Act.
I did not see it.
I posted it through the House system on 3 March and marked it for your attention.
I received a letter from Deputy Richard Bruton but not from Deputy Burton.
I posted it in the normal way. I will get a copy for you.
I checked my mail but I did not receive a copy.
I will get you a copy.
I have outlined my proposal on how the meeting should proceed. Item 3 is the Ombudsman's report, which we can deal with quickly as a result of the Finance Bill. We will deal with correspondence under any other business.
We will first deal with the European Union proposal regarding the commercial exploitation of public sector documents. We will hear from Department of Finance officials and then have a question and answer session with members. We will then try to reach a conclusion on the views of the committee. This will be followed by a further briefing by the Department on another EU proposal regarding a new financial services directive, which I suggest should follow the same format.
I welcome Mr. Colm McGlynn who will brief us on the directive on the commercial exploitation of public sector documents. I remind visitors that while the comments of members may be protected by parliamentary privilege, those of visitors are not so protected. Members are also 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, in such a way as to make him or her identifiable. I now invite Mr. McGlynn to make his briefing.
Mr. Colm McGlynn
I am from the centre for management and organisation development in the Department of Finance. I have prepared a statement, which is a briefing on the EU directive regarding the commercial exploitation of public documents.
The EU Commission foresees a major increase in the demand for e-content, especially for mobile devices. It believes that information held or produced by public sector bodies has significant potential in this market. The type of information envisaged would include geographical, meteorological, traffic, tourist, economic, statistical and registration data, etc. The Commission believes there is scope for combining this information or adding value to it to make saleable products and thereby stimulate the e-content industry.
At the last Council meeting of Ministers of Transport, Telecommunications and Energy, it was agreed that a simultaneous development of innovative services, applications, networks and content would contribute to a successful introduction of third generation mobile communication and broadband networks in the EU. It was acknowledged that the take-up of the new mobile and broadband services would critically depend on content and in this regard it was considered that the proposed directive would be an important factor in the development of the content sector. The Council agreed to work closely with the Parliament with a view to adopting the directive by the end of 2003.
A Green Paper on the issue was published in January 1999. A further paper was published by the Commission in 2001 setting out the proposals for the directive and launching an on-line consultation process. The draft directive was published in June 2002 and the objective is to have the directive passed by the European Parliament and the Council of Ministers by the end of 2003 and transposed into national legislation 18 months after being signed off. The voting method in the Council is qualified majority voting.
Turning to the purpose of the proposed directive, the difference in rules in member states makes it difficult for any commercial concern to provide EU-wide information products. In most member states it is difficult for organisations to determine what information is available for re-use and at what cost. In general there are no lists available of information held by public bodies and the cost of information varies significantly in different states and there is a lack of uniformity in charging mechanisms. The purpose of the directive is to attempt to harmonise the rules across member states in order that the potential market for e-content can be maximised.
The directive encourages member states to allow for the commercial re-use of documents that are already publicly accessible. It does not attempt to create new access regulations or to alter existing EU legislation in this area. The Commission accepts that there may be revenue loss to member states as a result of some of the provisions in the directive, but believes that this will be more than compensated for by the increases in revenue from the additional jobs created.
The directive will cover all documents held by public bodies in member states except the following: those exempt from access under existing regimes, for example, any documents exempt under FOI, statistical confidentiality or other legislation; those excluded by virtue of data protection legislation; documents for which third parities hold copyright; and documents held by pubic service broadcasters, educational and research establishments and cultural institutions. The directive covers all bodies covered by public law or financed for the most part by public funds. This would include all central government bodies, local and health authorities and most of the semi-State sector.
The term "document" is defined as including any type of information, either on paper, electronic format or an audio or video recording. It is also intended to include complete databases. There will be no obligation on public bodies to make documents available for re-use, but where they are made available the conditions of the directive must be applied. There is a provision for public bodies to make documents available under licence. This can be used to set the terms and conditions for re-use of the documents. Where a licence is used there is a requirement for standard templates to be available electronically and these must be capable of being processed electronically where it is feasible.
The directive envisages much of the data being made available on-line, for example, from a public body's website. The data will be accessible through a registration or certification facility. This will allow organisations or individuals to obtain certified log-on facilities through which they would acknowledge acceptance of the terms and conditions for the re-use of the data and download it directly to their own databases. This provision may require public bodies to put new facilities in place.
Where no time limit exists in current access regimes, the time limit allowed for the supply of the documents or the issuing of the licence is three weeks, with a possible extension of a further three weeks in complex cases. The intention behind licensing is to facilitate the regular ongoing supply of information to commercial concerns in a timeframe which is consistent with the re-use of the data. For example, traffic or meteorological information would have to be available for download on an hourly or daily basis, as appropriate.
The directive allows for the recovery of the cost of collection, production, reproduction and dissemination of documents with a provision for a reasonable return on investments. However, marginal costing is a preferred option for the Commission and the recital to the directive has a clause encouraging member states to implement this type of charging policy. Where charges are made it requires these be transparent and non-discriminatory as between similar uses. There is a prohibition on exclusive arrangements for the publication of public sector documents. The directive also encourages public bodies to publish information asset lists together with the cost structure for the provision of these for re-use and to provide these electronically, where possible.
Turning to the issue for Ireland, when the Green Paper was published, there was a general acceptance and welcome for the attempt to stimulate the content market, but concerns were expressed regarding protecting the privacy of personal data, the charging mechanism that might be implemented and the necessity to respect the principle of access to information already in place. The main issues raised by Departments and offices regarding the draft directive were similar to the comments on the Green Paper. These included the implication for public bodies that rely on income from sales and information products to fund the major part of their running costs; ensuring exemption of documents that are currently exempted under existing legislation; and the possible impact on day-to-day operations of all public bodies if a significant demand for documents should arise under FOI.
While the definition of the term "documents" in the directive is wide, in that it covers any information held by public bodies, the intention behind it is to release information such as mapping, registration data, meteorological data, etc., as listed previously, for commercial re-use. Most of this type of data is already publicly available in Ireland or is in the process of being made available. We have no problem with much of it being made available for re-use by commercial concerns.
In the initial draft of the directive, it was not clear if FOI-type information was covered. However, clarification of the wording in the general principle of non-obligation satisfied most member state delegations in this regard. As the directive is currently phrased, there is no obligation on public bodies to allow the re-use of this type of information.
The Data Protection Commissioner is satisfied with the data privacy provisions of the directive. The CSO requested the inclusion of an additional clause to cover statistical confidentiality. This was accepted by the Council working group. With regard to the cost recovery principle, we believe it is important that public bodies which are partly or wholly self-financing should continue to be able to maintain this position. For example, Ordnance Survey Ireland has been established as a statutory body to enable it to more readily behave in a commercial way and we are concerned that its financial basis should not be adversely affected. The Department of Finance would not like to see any reduction in revenues from such bodies, especially at this time. The total revenue of this type in Ireland is estimated to be approximately €30 million. Following representation at the Council working group on telecommunications and information society services on the matter, an additional statement was included in the recital recognising that certain public bodies are charged with being self-financing and could, therefore, recover total costs of collecting, producing, reproducing and disseminating documents together with a reasonable return on investment.
The proposed directive was discussed at a plenary session of the European Parliament on 12 February. The basic principle underlying the amendments proposed by the Parliament is that all public sector information which is generally accessible is by definition suitable for re-use and public bodies should not be given the opportunity to refuse permission for re-use. The amendments proposed by the Parliament include: widening the scope of the directive to include practical accessibility; narrowing the cost recovery principle to include only the particular information being supplied, as distinct from all data provided by the body; the inclusion of the right of appeal where an applicant considers that the charge for the information is excessive; making it obligatory to allow the re-use of all information generated as part of the political, legal and administrative process, particularly texts of laws and regulations, judicial decisions and the information of representative bodies, such as parliamentary information; requiring public authorities to promote and encourage the re-use of information made available by them; and requiring member states to facilitate the re-use of information by making available lists of main content assets, such as major databases, held by public sector bodies, including information on the conditions for re-use.
These proposed amendments were discussed at the Council working group meetings of 28 February and 3 March, and the group proposed to reject the amendments on the grounds that either the amendments refer to access issues, which are not covered by this directive, or what is proposed is already covered in the Council texts.
I thank Mr. McGlynn for his informative briefing and now open the floor for questions.
The fundamental question is where the property rights in these databases lie. Cost recovery is one thing, but if the State was to maximise the commercial potential of these assets, it would create an auction in access. This directive clearly determines that this is not the way to proceed. What was the thinking behind this? Instead of protecting the taxpayer and allowing taxpayers to maximise their assets, why have we decided to go down the alternative route?
As for bodies sitting on assets and not making them available, there should be an obligation on public bodies to make documents available for re-use. The only question is who should gain the clear return on the asset. If it is made available at cost to private developers, then they will get the surplus, at the expense of the taxpayer. I would need to be persuaded that there is some significant public benefit in the taxpayer forgoing what is clearly a potentially valuable asset in an information society. That is my main concern. I know the Government has got a concession that where there is an existing cost-covering body like Ordnance Survey Ireland, it can go beyond merely recovering costs and achieve some profit. For the Government to apply that generally to these information databases, it would have to set up quasi-commercial operations.
Is it envisaged in the directive that the State can be a partner in the commercial exploitation of any of these databases? I note there is a prohibition on exclusive arrangements but that does not mean, presumably, that the State could not be one of the competitors in the field using these databases for whatever purposes are deemed worthwhile. Does the Department of Finance envisage the establishment of any joint ventures to use the databases and get some of the benefit for the taxpayer?
What implications has this directive for freedom of information legislation and, specifically, for the proposed changes and restrictions on freedom of information contained in a new Government Bill currently before the Seanad? This EU directive on commercially-sensitive information was cited as a factor in the deliberations of the high-level group of civil servants which carried out a review regarding freedom of information legislation. What consideration have Mr. McGlynn and his colleagues given to the implications of this for freedom of information?
Mr. McGlynn
The directive has no implications for freedom of information. It accepts existing access regimes in member states and is purely concerned with the re-use of the documents. It does not attempt to make any changes in terms of accessibility. One of the proposals put forward by the European Parliament is that all legislative texts and judicial decisions should be published and made freely available, but that has been rejected by a Council working group. There are no implications for the Freedom of Information Act 1997.
Regarding the State's ability to exploit the information it has available, the Commission has taken the view that much of the relevant data is created as a by-product of providing public services. Thus, it is already paid for by taxpayers' money and should be made available to the public at a minimal cost. The Commission has also done some studies which show that marginal costing will do most to generate a market for these products.
Regarding the exclusive arrangements, the directive does prohibit one-to-one or private partnerships with private companies because if it is provided to one company at a certain rate, the State must provide it to all companies at the same rate. The document stipulates the principle of similar charges for similar uses. I am not aware of any moves to establish public private partnerships in the area of content management.
Mr. McGlynn is missing my main question. The electoral register is a valuable asset in the hands of a direct selling company and is something that the State gathers and has heretofore issued almost free of charge. There is a nominal charge of something like €57 to obtain the electoral register for an entire constituency. This directive seems to adopt the principle that the State should just recover its costs and cannot get for the taxpayer the benefit of these databases. The electoral register is a basic example, but mapping and all sorts of other information held by the State are valuable commercially. Why, in this directive, is the State being asked to give away these valuable assets at cost, more or less? What major public interest is served by throwing out this information to all comers at cost?
Mr. McGlynn
The main tenet behind it is that making the information available will create a content market. It is accepted that there is a cost to the State in doing so, but it is believed that there is significant scope for job creation in this area, and that it is therefore worth sacrificing Exchequer tax revenues that do not exist at present.
That is the basic point?
Mr. McGlynn
Yes.
I wish to follow up on my previous question. Page 4 of the Department's presentation notes that one of the main issues raised by the Department regarding the draft directive was the possible impact on day-to-day operations of all public bodies if a significant demand were to arise for documents under the Freedom of Information Act. The presentation also notes that it was not clear in the initial draft if FOI-type information was covered. Am I right in saying that, having considered these factors, the Department was satisfied that the current operation of the Freedom of Information Act 1997 was not inhibiting in any way movements which might arise under this directive? I presume this is because the Freedom of Information Act, as it stands, has clear exemption clauses where there is commercially-sensitive information or where requests for FOI are vexatious or abusive. Is the fact that it is already enshrined the reason Mr. McGlynn said that the development of this directive does not necessarily affect the Freedom of Information Act, as it stands, in a negative manner?
Mr. McGlynn
There are two issues regarding the Act. The centre for management and organisation development was concerned that its existing regulations regarding freedom of information would be affected by this directive, but that will not happen. The directive respects existing legislation and will not impact on the 1997 Act, as such. The other aspect of this matter is that the directive is aimed at information which is in the public domain, not information which has to be requested specifically, as such information has the most potential for re-use and for job creation. The information relevant under the 1997 Act will have a lesser impact on markets and job creation facilities. Such information makes the greatest demands on resources in the public service. The centre was concerned that a minimum return was being received for a maximum effort, whereas the opposite was the case with the other type of information. Both issues were addressed. The non-obligatory aspect of this directive means that each member state can decide on the information it will make available for re-use.
Mr. McGlynn's reply is helpful as it makes clear that the current operation of the Freedom of Information Act does not have a negative impact on the operation of this directive.
I would also like to know, in the context of the law which is developing regarding intellectual property rights, if the State owns intellectual property rights regarding information which is in the public domain. It has been mentioned that a great deal of State information is in the public domain. Has the State created any mechanisms for identifying intellectual property rights if information is used in a way that is valuable for a particular user? I do not refer to users such as local authorities, Departments or other providers of such information. A schedule of charges, which I assume is related to the effort and work involved, is arranged at present. Many commercial entities, such as photographers and sports stars, including the Dublin football team, identify intellectual property rights regarding images and information. What is the current thinking regarding such matters?
Mr. McGlynn
The State has intellectual property rights regarding all the documents it produces, but it does not normally enforce such rights. People are free to re-use such documents, subject to a requirement that the source is quoted. There are no plans to exploit intellectual property rights regarding such assets.
Images of the Taoiseach can be distributed free of charge to those who wish to use his image.
I am interested in how this applies to databases. The Department of Enterprise, Trade and Employment, for example, has a valuable database of companies that are registered under certain Acts. Could such databases be made available, at a cost, to those who want to engage in direct selling, for example? What sort of data protection measures, such as protection against spamming, are envisaged?
Mr. McGlynn
The Companies Registration Office, to which the Deputy referred, is covered by a separate first companies directive, which dictates how much the Department can charge for selling the information. I understand that a commercial arrangement is in place with a company for the reproduction of the database.
My second question referred to protection against the possible subsequent use of such data without referral back to those who are registered for an entirely different purpose.
Mr. McGlynn
The directive provides for a licensing regime whereby one can issue a licence which limits the use that can be made of the data and provides a level of protection. One would have to bear in mind the data protection issues that might be involved. When deciding whether to issue a licence, one would have to take into account the potential uses of the information.
A particular issue arises from time to time regarding people who carry out historical research in certain parts of the country. Tracing services are provided, for example, to people of Irish extraction living the United States. This is a significant source of employment in many parts of the country at community enterprise level and also for individuals who conduct such research. People involved in such work, which includes accessing the records in places like Joyce House, have shown concern about proposals which may affect how they operate. The work is commercial in the sense that those who seek information about their Irish heritage usually pay a fee to the community services or the person who conducts the search. Will the new directive have any implications for people working in this sector?
Mr. McGlynn
I am not sure how such matters are arranged at the moment. It is intended that the register of births, deaths and marriages will be made available to citizens on-line and it will probably be made available to companies for reproduction. I assume the same rates will be involved. I am not sure if there will be implications as I do not know how the system operates at present.
It should continue to be available.
Mr. McGlynn
Yes.
Do individuals and organisations have the option of not being included in these provisions? Most modern documents include a box that can be ticked if one does not want one's details to be included on a database, or to indicate if one wants further information. Will, for example, a list of all persons with a television licence be made available to companies, or will individuals have the option of indicating that they do not want their details to be included on such a database?
Mr. McGlynn spoke about the registration process, but I would like to know what sanctions are proposed for dealing with people who do not register to use information that is publicly available by electronic means. How is it proposed that the use of information by non-registered people will be dealt with?
Mr. McGlynn
The directive will have no impact on access by non-registered people to information that is available anyway. This directive is to be published as part of e-government initiatives which may relate to the re-use of information that is already available. A disclaimer can be placed on a website saying that the re-use of information infringes copyright. It will be the duty of the State to pursue such infringements. It is acceptable that people may want to sign a licence to allow them to re-use information.
I also asked if individuals can request that their names not be disclosed. Does an individual have the right to say that he or she does not want his or her name to be placed on a database that will be capable of being accessed by others for commercial purposes? Examples of such databases are those which contain information about television licence holders, ESB customers, social welfare recipients or those who receive farm assist. People may be uncomfortable about having their names on a long list of databases that are used for commercial purposes. Will they be allowed to say "no" in such circumstances?
Mr. McGlynn
That issue is a separate one and is not really part of the directive. Many issues are involved. One gives personal data, which one may not necessarily like to be made public, when one registers for a television licence. One may give certain information when registering land - such information has to be made public as people are entitled to know who owns certain lands. Different regulations apply in different cases. One can place restrictions on the uses that can be made of certain information when one issues a licence allowing another party to access it. For example, a licence that is issued may include a condition that the information involved may not be used for the purposes of spamming or the creation of a mailing list. A company that uses the data for such purposes will infringe its licence.
Is it not the case that the EU Parliament working group will make the expanded directive compulsory? Is it not the case that we should be expressing concern, if not alarm, at the extension? This is an example of the type of directive that gives people due cause for concern at the intrusiveness of EU legislation.
While some examples are cited in the documentation, we need an outline of the effects the extension will have on public sector bodies in the State and how it will impact on their current right to withold from the public domain and others, information that could be used for commercial gain. It is difficult to see the commercial gain that others would make from the release of information held by public sector bodies.
I do not have the resources to examine the response to the proposals in other EU member states. What information can Mr. Glynn offer us in this regard? We note that the Council working group has discussed the proposed amendments and has decided to reject them.
Mr. McGlynn
The directive is a joint directive. If both the Council of Ministers and the Parliament do not agree to all its provisions, it will not be passed.
The main form of commercial gain is in the areas of mapping, meteorological information and tourism. Travellers or businessmen moving from one jurisdiction to another need information about where they are going, the climate, traffic and sites of interest.
We are insisting on there being no obligation where the issuing of information is concerned. If it is decided not to allow the re-use of information, there can be no compulsion. It is only where re-use of information is decided upon that one will have to be transparent and adhere to competition law, etc. There is no compulsion on any body to make any database available to the marketplace for re-use.
Is that the current position?
Mr. McGlynn
That is the current position and it cannot be changed unless the Council of Ministers agrees to do so. Most other states are in agreement on this matter. The contents of the documentation have been agreed by the working group. Some states have more to gain and they will be pushing the Parliament perspective but the member states are mainly in accord with our stance.
I am not sure I agree with our stance, as it has been described. The Parliament has a point in saying that, if information exists, it should be made available under licence. The official stance seems to be that it will be up to each body to decide whether to bother releasing information and that it is only if they decide to release it that licensing and outlining the terms on which it will be made available will have to be envisaged.
Our stance is not a good one. I would have more sympathy with it if we wanted to ensure that taxpayers got a reasonable return for the assets of a public body and if the body recovered more than the cost of the databases and assets it had assembled and earned a surplus. I do not have much sympathy with the contention that if a particular Department is obscurantist and has been doing things in the same way for eons, it is entitled to say, "We will not release this information. We are still in the age of the plume and we will stay that way, thank you very much." I am more sympathetic to the view of the Parliament than that of the Government.
What conclusions should we draw? The contents of the position paper have been outlined to the officials and it is up to the members of the committee to say if they are satisfied with the approach or if they want certain points taken on board by the working committee.
There should be a presumption that bodies will release the information under licence, giving due protection to the public, unless they can demonstrate that unreasonable burdens are being placed upon them, in which case they could adopt the opt-out position.
I presume there would also be provision for the safeguarding of intellectual property rights of state bodies, such as the meteorological office. There is much talk of third generation technology. The facility to send a text message to the meteorological office for a weather forecast is a valuable commodity. I presume that the office's making of arrangements with cable companies or television and media sources to sell and supply its information, will continue. Similarly, I presume that the mapping services, which already involve private operators working in conjunction with Ordnance Survey Ireland, will continue. I have already made reference to people doing genealogical research, which is associated with the tourism industry.
The current draft of the directive does not impose any obligation on public sector bodies to release data for the commercial purposes of others. That is the correct position.
The whole point is——
The public sector——
——e-commerce.
Of course, but the public sector bodies——
Let them make profit from it.
——have control over the data and the wherewithal to exercise themselves regarding the information they hold. However, the idea of compulsion on public sector bodies to release information to other players who will exploit it for commercial gain is worrying. The public sector bodies are the entrusted bodies and this should not change. There is access to information and the public sector bodies have the opportunity to release it and make it freely available. I am concerned about a European directive that would compel public sector bodies to issue information.
To be fair, this is our Europe and not someone else's. I see merit in public bodies releasing information because they should not be allowed to sit like a dog in a manger and decide that they have garnered information-based assets on which they are going to squat although they know they could be of great value in the creation of employment, business and travel opportunities. The presumption that this information should be made available is correct. I applaud Europe for trying to achieve uniform rules which will see enterprising Irish people being able to exploit these information assets in other countries in the way they can here. We should welcome the principle but reject the Government's decision to leave to the bodies the right to remain as a dog in the manger if they choose for even trivial reasons not to release information. I agree with Deputy Ó Caoláin that licence terms should be invoked if there are sound public policy reasons for protecting information. State bodies can then oblige users to employ information only in certain circumstances.
I am sympathetic to the notion of allowing a public body to profit from this activity. There is provision in the directive to allow a reasonable rate of return on investment, but I imagine the concept of what constitutes such a return is elastic. It seems that the option is for the rock-bottom rate. The presumption should be to make the information available, but we should not throw away the potential for taxpayers to obtain a more than reasonable return. Information assets could prove valuable over time. Bodies should be remunerated at a decent rate for continuing to collect this information rather than having to dump it on the market at marginal cost prices. I take a different view from that of Deputy Ó Caoláin, but I am sympathetic to his view that taxpayers should get a better bang out of this than is being envisaged in the directive.
Taxpayers should certainly get a better bang. The complexity of the matter should be appreciated whereas I am giving an initial view without the opportunity to examine much of the information which should inform the decision we make. We take on board Mr. McGlynn's comments. It is already the case that public bodies which are partly or wholly self-financing receive a return from the release of information. We note also that the Department of Finance estimates revenue in this area at €30 million in Ireland alone. We support a greater return, but I would be happier if public sector control, which I think well of, was maintained. Compulsory release of information that will affect each and every one of us should not be placed in the hands of others who will exploit what they buy for private gain. The view articulated by Mr. McGlynn is the correct one to adopt.
I recall for the benefit of Deputy Bruton an outstanding example of the successful commercial use of this sort of operation by a former Member of the Dáil, Mr. Liam Lawlor, who took my seat in a previous election. In response to inquiries at a recent tribunal, he said he was paid a substantial sum of money by a property developer and he indicated that the information he provided in return consisted of detailed copies of statistics relating to population growth in west Dublin. The matter is still under investigation. Some persons can exercise their ingenuity to exploit people who are willing to pay for copies of Central Statistics Office reports.
Marginal pricing means intellectual property developed by State bodies with large resources, such as Ordnance Survey Ireland, is made available at rock-bottom cost. There are good reasons such bodies are in the public sector. The observation of the Department of Finance that it wishes to protect reasonably the ability of bodies to recover costs is commendable. The services involved are important.
I will ask the clerk to the committee to draft a report to reflect what has been said. We are talking about documents which are already publicly accessible. What is at issue is the release at cost price of valuable State assets to private sector interests which stand to make substantial profits. It is right that the private sector should have the opportunity to create employment and increase national economic activity, but I would hate to see a reiteration of the scenario in which a mobile phone licence sold to a private company for £15 million was sold on for £2 billion. Many in the Oireachtas feel that the State should have received the latter sum, rather than the group which paid the initial price. I share the concerns of Deputies in this regard.
The title of the document which refers to commercial exploitation is unfortunate. If there are substantial profits to be made from the release of this type of information, the State should have the opportunity on behalf of the taxpayer to participate in them. Other committee members may not agree. In the interests of the taxpayer, the State should have the right to review potential profit margins. The profits should be shared with the taxpayer who has provided the asset. If people disagree, they are welcome to correct me. I am not suggesting that we include the idea in the report, but my comments should be considered when a draft report is being circulated. At our next meeting, we can amend or approve it.
The only issue on which there is disagreement is the presumption, which I agree with, that public bodies should make their information available unless it is unreasonable. Deputy Ó Caoláin takes the view that public bodies should continue to be allowed to decline to provide information. The committee will have to make a net call on the matter.
I accept that and I will ask the clerk to clarify the issue with the Department's officials between now and the drafting of the report. The report will hopefully shed light on the issue at which point we may agree or disagree and make amendments accordingly at our next meeting.
The point is that the documentation in question is already publicly accessible. Nobody is saying that it cannot be released and I do not recognise the dog in the manger label that was used earlier.
That is the point we will seek to have clarified.
The European Parliament is seeking to compel bodies to release information whereas our Minister rejects that concept. If all the information in question was already available, our Minister would not be holding out against the notion of compulsion. There are obviously information assets which bodies are considering refusing to release. They should show good reason for not releasing such information rather than the other way round.
I reiterate my point that if the reference to the documentation being available at marginal costing was to apply to all documentation it could mean certain public bodies like the Ordnance Survey or the Meteorological Office might end up distributing information at a loss where they currently break even or make a contribution. Information about the weather services is widely sold——
I agree with the Deputy.
——and very successfully sold in the United States to television and cable channels. In any directive it is correct that we should seek to protect the capacity of such public bodies to recover their costs and make a contribution.
That is a point on which everyone is agreed. The only point on which we are not agreed is whether there should be an element of compulsion on the release. I certainly am of the opinion that the State should have the opportunity to get more than just marginal costs and that it should be getting a very handsome return on its work if handsome returns are there to be had.
I will conclude at this point and ask for a report to be drafted and circulated to the members. I thank Mr. McGlynn for his informative briefing. We will move on to consideration of Comm. 2002 No. 625, which is a financial services directive.
I welcome Mr. Colm Breslin and Mr. John Moore from the Department of Finance and Mr. Donnacha Connolly and Ms Downey-Keegan from the Central Bank. I remind visitors that while the comments of members are protected by parliamentary privilege, those of visitors are not protected. I invite Mr. Breslin to make his presentation to the committee.
Mr. Colm Breslin
I thank the committee for its invitation to discuss the European Commission's proposal for a revised investment services directive. It is a complex and wide-ranging proposal and I hope to explain its main elements in relatively clear terms. We will be happy to answer questions from the committee following my opening statement. I will outline a brief background to this proposal and the regulatory regime under the existing investment services directive.
The original ISD was adopted in 1993 and its provisions were transposed by means of the Investment Intermediaries Act 1995 for investment firms and the Stock Exchange Act 1995, which covers not only the Irish Stock Exchange but also member firms of the Irish Stock Exchange, the brokers. The 1993 ISDs central objective was to provide a European passport to non-bank investment firms to carry out a range of investment business such as order collecting, execution of orders on an agency basis, dealing, portfolio management of securities and security arrangement instruments either through branches established in other member states or directly on a cross-border basis. The 1993 ISD did not achieve its full potential for a number of reasons. Some parts of it did not work as well as intended, such as the single passport provision.
The idea behind the single passport is that an investment firm, once authorised by its home member state financial regulator, should be able to operate EU-wide on the basis of that home country authorisation and supervision. The 1993 directive allowed host countries to impose their own conduct of business rules on investment firms that sought a passport of entrance. Thus, an investment service provider operating on a cross-border basis and subject to scrutiny of its business conduct in its home member state could be faced with also having to comply with the host member state's conduct of business rules. Despite the shortcomings of the 1993 ISD, large numbers of European investment firms have made use of the ISD single passport even where this meant that they had to comply with two or more sets of conduct of business rules. It has greatly assisted the development of our own IFSC where companies engage extensively in the cross-border provision of investment services into other member states.
There have been significant changes since 1993 in the way the markets operate. There are new types of trading platforms or trading securities known as alternative trading systems or ATS. These developments mean that the 1993 ISD needs to be revised in terms of scope and structure. A primary objective of the latest ISD proposal is to give investment firms a more effective single passport which would allow them to operate more freely across EU on the basis of authorisation and supervision by the competent authority in their home member state and by limiting the restrictions that can be imposed by the host member state. It will increase the harmonisation of national conduct of business rules. While there was a lot of commonality in these rules across the EU, there were also some differences. By harmonising the conduct of business rules, the same provisions will apply throughout the Community ensuring that both the consumers and institutions are aware of their rights and obligations. Under the old ISD problems also arose due to different interpretations of certain provisions in the directive by member states. Harmonisation together with greater clarity and uniformity of interpretation will ensure greater legal certainty across the member states. It will give investors across the EU a level of protection when employing investment firms regardless of where in the EU those investment firms are located.
Some of the other proposed changes are that it broadens the range of investment services for which authorisation is required under the directive, in particular to include investment advice. People who give financial advice for remuneration are already regulated in Ireland but not in some other member states so we support this proposal in principle. Another feature is that it clarifies the ancillary services which an investment firm can provide, for instance, financial analysis and research, which is not currently covered by the ISD, will now be covered as an ancillary service by the new ISD. Whether it will be regulated by member states is a matter for each member state. It also clarifies the distinction between retail and professional investor. It imposes a requirement on a firm to investigate a retail investor's financial knowledge and experience rather than allowing execution-only trading and the Lamfalussy approach will also be followed so as to provide a mechanism for insuring there is co-operation, co-ordination and exchange of views between the regulators from the various member states to ensure a consistent approach to the implementation of this directive across the EU.
When the ISD was adopted in 1993, there was little competition at the level of the trading platform on which securities were traded. Most buy and sell orders were matched through the official regulated stock exchanges but there is now a new market landscape. The functions provided by a stock exchange of matching buy and sell orders, price setting and information dissemination, can be replicated by alternative trading systems or in-house by banks or investment firms. In fact alternative trading systems or to use the term preferred by the directive, multilateral trading facilities, MTFs, now account for a large volume of trading. Under the new ISD a multilateral trading facility will be categorised as a separate investment service with additional trade reporting requirements. It also introduces a rule that there be an annual renewal by investors of consent to have their orders transacted outside a regulated market or multilateral trading facility.
One of the most controversial provisions of the draft directive relates to what is known as "internalisation", even though the term is not specifically defined in the new ISD. Internalisation of order flows occurs where, for instance, an investment bank executes a client's order in-house rather than through an exchange, either by matching the client's buy or sell order against another client's buy or sell order, or by filling it themselves against its own trading book.
To ensure internalisation does not compromise overall market efficiency, the new ISD includes the following provisions. Investment firms will be subject to an obligation to make immediately public to the wider market the price and volume of all off-exchange transactions. This is called post trade transparency. It also obliges pre-trade transparency requirements on banks and investment firms in the form of the client limit order display rule. This is where a client gives an order to a bank and specifies the terms under which he is willing to buy or sell the security. The bank or investment firm shall display that order to other market participants if it is unable to fill the order straight away. In other words, it is not allowed to queue that order in its system until the market moves in the direction of the specified price and it will be forced to reveal these trading opportunities to other market participants. Firms dealing on own account are also obliged to give an indication of the terms on which they are prepared to buy or sell a specified share - the quote disclosure rule.
As to where the directive now stands, it has been referred to ECOFIN and the European Parliament. The Council referred it to COREPER and a Council working party has been convened and is examining the proposal in great detail. Ireland is participating actively in the working group. We have indicated that while the general principles in the proposal are to be supported, the precise wording of requirements requires careful scrutiny. We have expressed concern about particular provisions, for instance, we have queried the requirement that advisers should have professional indemnity insurance. Such professional indemnity insurance may not be available at an affordable price and could threaten the survival of smaller firms, or even bigger ones, who do not hold client moneys. We have consulted with interested bodies at national level and we will carefully evaluate any points raised by them or other member states as the discussion proceeds.
We will now consider any questions members of the committee might have.
On the face of it this appears to be a good thing in that it potentially removes barriers to trade. It appears to ensure that people are providing financial analysis and research, as well as trading, and that they are providing greater clarity. It surprises me that there is an obligation to know the financial knowledge of a retailer. Is this intended to mean that if someone has an agent in a local area they must vet the experience of that person? Is that practical, particularly if routine trading is involved? Is the obligation to make immediately public these internal transactions to be done by way of posting to a website? What exactly is envisaged? Presumably if one asks their stockbroker to sell Allied Irish Bank shares, one does not know whether he has sold them or just filled an order off his own books. He could sell them internally. I wonder how will this be fulfilled in practical terms. I take the point about professional indemnity insurance. It would be a great burden if that were expected in all cases. Is the requirement intended to regulate web based auction sites? Is that the sort of thing these alternative trading systems would envisage regulating in this way?
Mr. Breslin
A number of questions have been raised. I will answer some of them and I will hand over other queries to my colleague from the Central Bank.
Currently a retail investor can walk into somewhere like FEXCO and ask for £10,000 worth of CRH shares or whatever. They can transact the order on an execution only basis. He is not looking for nor wants advice. He has his mind made up that he just wants to buy the shares, which is perfectly legitimate at the moment. Under the new requirements there would be an obligation on the agency to check out that he was properly informed about the risks involved and so on. It could seriously jeopardise the whole area of the market that deals with execution only. This could also have serious implications for people dealing in electronic trading via the Internet or whatever. How would the entity that was trying to fill that order check over the Internet each time a trade was coming up that the person was adequately informed and in a position to undertake the particular trade, not just that they had sufficient resources? One would presume that if someone was trading over the Internet their financial resources would be vetted beforehand, including a check on each trade as to whether one is properly informed and capable of making an informed decision about that trade.
This element of the proposal put forward by the Commission is undergoing strong debate in the working group by many interests who regard it as over the top and likely to greatly reduce liquidity in the market, impede the development of the market and push up prices. If an element of advice must come into every transaction, whether the client likes it or not, that takes more time, will push up costs and make the whole operation more expensive. This particular feature of the draft directive is undergoing intense debate at working group level and I hope some change will come from that.
There were a number of subsidiary questions in regard to how the proposal will affect web based activities. I will hand over to my colleague from the Central Bank to respond to that point.
My understanding is that as long as the web based auction sites fall within the definition of the multilateral trading facility they will be subject to authorisation under the ISD. We are talking about the buying and selling of securities and the matching of orders of buyers and sellers restricted to the members of that multilateral trading facility.
Does it cover spread betting?
The way the ISD is currently drafted covers spread betting. Ireland has requested a change to the wording of the directive to restrict it to spread betting in relation to financial products only and not in relation to sports spread betting for example. This has been supported by the UK and the other members states do not appear to object to it.
What impact, if any, will the new financial services regulatory authority have on the operation of the directive, given that it will affect firms, brokerage houses and so on who are involved in buying and selling? If the Central Bank and Director of Consumer Affairs want to ensure fair play for consumers, will the new regulatory mechanism apply, particularly in relation to the concerns expressed at the end of the document about professional indemnity insurance? Will that factor apply in regard to the regulation of financial services in general?
Mr. Breslin
The Central Bank is the main financial services regulator in the country. Virtually everything is regulated by the bank, apart from insurance companies, which are regulated by the Department of Enterprise and Employment, and credit unions. Insurance companies regulation will transfer to the IFSRA as soon as it is established, so that it will become an even more all-embracing financial regulator.
At present, investment services, including providers and investment firms, are authorised by the Central Bank and the IFSRA under the new arrangements. The IFSRA is building in new provisions regarding greater consumer protection. At present, the emphasis tends to be on the protection of depositors in the banking area and the solvency of investment service providers and such like. The Central Bank must ensure they are solvent and have adequate resources.
There will be a greater focus on consumer issues under the IFSRA. How that will impact on this area will to some extent depend on the final shape of the directive. However, many safeguards are built into it to protect consumers. For example, the conduct of business rules are essentially concerned with ensuring that the client is aware of his rights and knows what he is doing. The aim of the rules is to ensure that the investment firm acts in the best interest of their clients.
A big change envisaged by the directive is that there will be one instead of 15 sets of conduct of business rules in the European Union. It will be one size fits all, which means that the national rules in each member state will have to be modified to some extent. It also means that some of our present safeguards may be slightly diluted, but we will adopt other safeguards pertaining in other member states. It will involve some give and take. However, together with the conduct of business rules and the emphasis on greater consumer protection under the IFSRA, I am sure the consumer will be well protected under the directive.
I do not fully understand the position. When the IFSRA is established it will have certain objectives with which the Central Bank will be closely involved. Insurance and investment intermediaries will be included under the IFSRA umbrella.
Mr. Breslin
The insurance intermediaries are already included under the Insurance Act 2000.
When the Oireachtas debated the IFSRA Bill, I referred to the Taylor case. There have been a number of other such cases where investors have lost their money because of the conduct of the practitioner. I am concerned about the notion of private indemnity insurance. While I appreciate your concerns that it will be very expensive, I am concerned that if it is not to be included, there should be some other mechanism to protect members of the public. If something goes wrong with the big banks they are usually big enough to compensate. However, this has not been the case with some of the smaller players in the investment industry. The Central Bank regularly publishes notices about people which it considers to be unscrupulous in offering various investment services. What alternative form of protection do you propose when the regulation provisions come into effect through the IFSRA?
Mr. Breslin
There are a number of aspects to this. First, it is a requirement under the directive that investment services providers be covered by compensation schemes. Ireland already has an investment compensation scheme, which to some extent covers losses incurred by investors. The requirement that providers be party to an investor compensation scheme are copper-fastened in the latest directive. Protection will be provided. At present the protection is limited in scope, providing cover for up to a maximum of €20,000. Some people have much larger investments than that and to the extent that they incur greater losses, further compensation can depend on what is recovered by the liquidator of the entity in question.
Some providers do not handle clients' money and, therefore, it is not at risk. However, the directive proposes that they take out professional indemnity insurance. It may not be available in Ireland and, if so, it may be costly. At present, the Central Bank makes one of two requirements, first, that that the provider indicates solvency or, second, that they indicate a certain level of capital adequacy. Some of the bigger agencies have indicated they would rather put up a very large sum, perhaps even as high as six or seven figures, by way of a capital amount rather than try to take out professional indemnity insurance for, say, €1 million. The reasons for this are, first, that it is very hard to obtain and, second, it amounts to dead money, like rent on a house. By contrast the capital sum can earn interest or whatever. I will hand over to my colleagues in the Central Bank in case they wish to elaborate on this.
These kinds of investment firms will be required to take out professional indemnity insurance. They are investment advisers and because they provide a limited service they are exempted from what is known as the capital adequacy directive, to which the larger investment firms are subject and which requires them to hold significant amounts of capital to cover the risks to which they are exposed. To counteract their exemption from this, the EU Commission has decided to require them to take out professional indemnity insurance.
You have indicated you have a problem with that. How do you propose to balance the concerns of the Commission regarding protection?
Our concern arises from the difficulty these firms may have in getting professional indemnity insurance. In view of this, we are leaning towards the idea that they become subject to a similar regime of capital adequacy that applies to the larger firms.
This is a substantial tome. The researchers in my office have waded through the first page. You have highlighted the situation regarding the PII, to which Deputy Burton referred, but you implied that a number of provisions are causing concern. Will you elaborate on this?
You have consulted with interested bodies at national level and will carefully evaluate their points. At what stage is that process? Is it in the embryonic stage or is there some feedback? Are you informed of the concerns of people within the sector here in a way you could share with us now or at some point in the future? I asked for feedback from the representative from the Department in the last section of our meeting. What other points have been reflected by other member states in consideration of the new investment services directive? Are discussions proceeding? Is there potential down-sizing or are there areas of concern? As a person with little exposure to the type of business that is involved here, the ordinary man and woman in the street would be concerned at the element of facilitation of the better heeled sector of our society for using the opportunity for tax avoidance or some other activity involving easier access to investment outside our own economy. May I have answers to these questions to enable me to get a sense of the position here?
Mr. Breslin
In regard to how the negotiations are going, the Greek Presidency has indicated this is a top priority for it. It will carry through to the Italian Presidency and they have indicated that they too intend to put it high on their list. Hopefully, it will be finalised by the end of this year, even before the Irish Presidency starts next year. There were meetings on 8 and 9 January, 29 January and 12 and 13 February. Within six weeks there were actually five days of meetings. There is another meeting next week on Monday and Tuesday, 10 and 11 March and another one lined up for 28 March. Compared to some other directives this one is getting intensive negotiation.
They are still on the first reading in the negotiations but they are up to article 32 at this stage. There are over 40 articles in it. It is quite a complex tome. People tend to interpret different provisions in different ways depending on where they are coming from in their own regime. We pick up things by seeing how other people have a different slant and have taken a different meaning out of the same provision. The result is that everybody has put down scrutiny reservations and there are footnotes down in regard to every article and many of the provisions of every article from almost all the member states. Not everybody has reservations on every one but between the 15 member states there are reservations or a need for further consideration in regard to virtually everything in the directive. The process is at a preliminary stage in that people are still making up their minds about how strongly they feel about certain of the provisions.
In regard to feedback, we have been in touch with various people at national level here. We have got views back from the Irish Bankers' Federation, the Irish Stock Exchange, PricewaterhouseCoopers and the ITG group. That is most of what we have got in terms of industry. A big concern in Ireland is one we touched on earlier concerning the restraint on execution only. An even bigger concern relates to internalisation which I touched on in my presentation. That is where, for example, banks from investment firms match orders in-house or against their own proprietary position. There are a number of concerns on that issue.
I will sketch in a little background on internalisation first of all. The Irish market in securities is quite small. The top eight or ten listed equities are liquid but the rest of them tend to be quite illiquid. One might well be a long time waiting to find somebody to buy them if one tries to sell them. With internalisation there is a much better chance that the bank or investment firm might buy them on a proprietary basis and be prepared to deal with them, but not if they have to start disclosing the prices at which they are prepared to deal on that beforehand. Often they are using their own capital to deal in this market and that could expose them to other movers in the market. They are concerned about that. Everybody is quite happy with post trade transparency. In fact, when deals are done in-house they are required to be and are posted to the Irish Stock Exchange within five minutes. There is full disclosure after the event.
Some of the provisions could impinge upon the mechanisms that have come about to try and make the small Irish market, and the small trading there can be in Irish shares, more liquid. It could be disadvantageous from that point of view. We have been making these points in the working group. Mr. Connolly may have something to add about the specific concerns expressed by industry in regard to various provisions of the directive.
As Mr. Breslin has outlined, internalisation is an issue about which some of the banks and major stockbrokers are concerned. What they are doing currently, especially some of the larger brokers, is using their own capital to provide liquidity to the market. This basically means increasing the number of buyers and sellers available to buy and sell shares. The more buyers and sellers one has, the more people who are willing to come to the market and trade on it. If they are exposed by being asked to disclose pre-trade the prices they are willing to buy and sell at, they may withdraw from the market. By doing so they may withdraw the liquidity that has been put into the market. The concern is that this will damage the Irish market as a whole. The Irish market includes the Stock Exchange but it also includes this internalisation trading. That is a concern in relation to the new ISD as it is drafted.
Another concern we have relates to the introduction of investment advice as an activity that needs to be authorised. In Ireland, investment advice is currently regulated but it is not an ISD activity. We do not want to see any dilution of the conduct of business rules and regime we currently have for regulating the provision of investment advice. As Mr. Breslin mentioned earlier, by making it an ISD activity the conduct of business rules in relation to investment advice will have to be harmonised throughout Europe.
There is also the issue that a lot of the people providing investment advice also provide advice in relation to insurance products. The regime in relation to insurance, which is underpinned by the forthcoming insurance mediation directive, is different to what they are proposing in relation to the ISD and it would mean that small investment advisers could be faced with two different regulatory regimes. We want to make sure that the regimes are similar. These are probably the major concerns we have at the moment.
In regard to the small investor, advice has been more expensive in more ways than we think for investors in the stock market recently. Execution type sales have been mentioned and the market is very small. Having to look for consent to go onto these markets would probably wipe them out completely because the margins are very small in this type of market.
Arguments put forward by the banks in regard to internalisation are that there is poor liquidity in the Irish stock market. Many of the people who invest in this market give their money to the banks and set low or high selling and buying figures depending on the way they want to work it. That sometimes works to the advantage of the banks because they do not have to respond as quickly but can just sit on the money and let it queue up for a few days to see how the markets work. As someone who used it, I found it to be an almost useless system which works completely against the investor. The banks can sit on it and see what happens but if one tries to sell it on, they will sit on it for so long that they will never be disadvantaged. Arguments have been made from the point of view of the bank, but there are many arguments from the point of view of the small investor. FEXCO, which has been mentioned already, revolutionised small investment in the market because its cost is so low that people with small amounts can get involved in the stock market. Unfortunately, in the past couple of years they have learned a hard lesson, but at least they could get involved and make their own decisions. Much of what we have heard has been from the point of view of the banks and the current structure of the rules and regulations favour them rather than the small investor.
There are provisions in the new directive to address the conflict of interest to which the Deputy refers. Investment firms will have to prove they are providing best execution to clients compared to the prices available in other venues. The price offered has to be as good as anyone else offers. They are also introducing what are known as client order handling rules that relate to the speed at which transactions are executed and the order in which they are executed. Firms will also have to prove to the regulator how they are avoiding or disclosing to investors various conflicts of interest that may arise because they are trading their own book against their clients. Some of the concerns to which the Deputy referred are being addressed in the proposals under the new directive.
Members of the Stock Exchange have to comply with conduct of business rules which require them to achieve best execution and they also have client order handling rules. My understanding of the position of big banks is that they usually pass orders they receive to their subsidiary stock broking companies which are subject to those rules and should be in compliance with them.
What will happen in the case of banks not being able to fulfil the order immediately? If, for example, I go into one of the major banks and it places its order that evening with its stock broking firm, what time limit applies before it has to release it to one of the other major banks and what does the method of release involve?
There are no rules in relation to that at present. The new directive proposes that if one cannot execute the order immediately, any limit orders received will have to be put onto the regulated market or a multilateral trading facility. It will actually be posted onto the system so other investors and market participants can execute that order if they so wish.
If there was more openness in regard to this directive it could help to expand the market even more by getting people trading in shares that are outside the Irish Stock Exchange.
One of the core elements of the directive is to try and achieve greater transparency in the market by obliging large banks and investment firms to disclose their trades, post-trade and to an extent pre-trade. Multilateral trading facilities currently have no obligations to make post-trade or pre-trade disclosure but they will have to do that as well, so it is an attempt to make the whole process far more transparent so that the prices achieved by investors actually reflect the total numbers of buyers and sellers that are in the greater market. The concern at the moment is that the prices one sees from day to day in the Stock Exchange reflect a limited aspect of the market.
It was mentioned that much harmonisation of rules will follow in the wake of this directive. One of the features that appears to be a strong selling point for Ireland in so far as the IFS was concerned is that it was perceived that the Revenue Commissioners and the Central Bank authorities were very quick to move when products were emerging and that the regulatory regime while prudent was very responsive. Is there a danger that we will lose that advantage in respect to responsiveness?
Mr. Breslin
No, I do not think there is any danger of that at all. In fact, because people will just start passporting into other countries on the basis of the conduct of business rules that have been established they do not have to clear a hurdle, as such, on the way in to another country. I take it the Deputy is referring to the development of the asset covered securities in the past 12 months which was launched in the last week or so. It should not affect the capacity of the market to innovate or the speed with which the Irish authorities have tried to respond to such innovation by giving it statutory underpinning. I would not see this being threatened by the directive.
We will conclude our discussion. I thank the delegation for attending, for the presentation and for answering questions. Is the committee satisfied with a straightforward report to the effect that we have considered these proposals and are happy with the approach being taken? If we can agree on that it will short circuit having to come back with a draft report. We will conclude on that basis and the report will be sent to the sub-committee on EU scrutiny and to the Dáil.