The purpose of this part of the meeting is to consider the following: a motion re a proposal for a directive of the European Parliament and of the Council on criminal sanctions for insider dealing and market manipulation. The briefing has been circulated to members. I welcome the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, and his officials. The format of the meeting will be a briefing from the Minister followed by a question and answer session. We have been here since 9.30 a.m., so members are coming and going. I apologise for the low numbers but that might reduce the number of questions and I might get the Minister out of here time.
Proposed EU Directive: Discussion
I thank the Chairman. I am accompanied by John Kelly, Sabha Greene and Vincent Madigan. As members will probably know, the background to this motion is that under the terms of the functioning of the EU Council, we must notify whether we are willing to be bound by directives in the justice area. This is one such directive. Ireland, like the UK, must decide whether to opt in to be bound by it. In advance of that, I must appear before the Houses of the Oireachtas to seek approval that we opt in.
The subject of the motion is the Commission's proposal for a directive which will, for the first time, set out a common set of offences across the Union and send a clear message that the EU will not tolerate abuse in its financial markets. The draft directive will also require member states to provide at least a shared minimum level of criminal sanctions for those offences in their national laws, so there will no longer be an opportunity for so-called "forum shopping".
Before I turn to the detail of the directive, I will set out the context for this proposal. The original EU regime for market abuse dates back to 2003 and, as members well know, much has happened since then. The Commission has identified a number of areas where that system is no longer fit for purpose, so it has published a package of proposals designed to update and enhance the regulatory regime. There is a number of elements to that. One is to extend the cover to a wider range of financial markets and products while another is provide greater powers of enforcement. Those two are embraced in the Markets in Financial Instruments Directive and a new regulation on insider dealing and market manipulation also known as the market abuse regulation. This third directive deals with criminal sanctions, so the three pieces together are intended to improvement enforcement across the EU. The other two do not fall within the justice pillar and, as such, do not have the same procedure as that in respect of the criminal sanctions.
The current difficulties with enforcement across the EU arise because the Commission found in its research that there are significant discrepancies between the existing regimes in the member states. For example, some countries lack effective sanctioning powers while in others, criminal sanctions are not available for certain market abuse offences and this leaves scope for market abusers who can take advantage of the differences and avoid sanctions by choosing to establish in a member state with few sanctions while trading in another member state. The divergences between the laws in member states can also hinder prosecutions for cross-border activities as enforcement agencies take different approaches or work to different rules and definitions of offences.
Clearly, this situation cannot continue, so the proposed directive is designed to remove these differences between member states and so eliminate the opportunity for investors intending to abuse market rules to choose the most benign jurisdiction for their base.
The directive has nine key articles. The first two cover the scope and definitions to be used. These are still open questions as the final scope and definitions will only be clear when the EU has adopted two related legal instruments, namely, the Markets in Financial Instruments Directive and the proposed regulation insider dealing and market manipulation. It is only when the negotiation on those draft regulations are complete that we will see precisely what trading activities and what types of financial instruments will be covered by this directive.
Articles 3 and 4 define the main market abuse offences and these will be insider dealing and market manipulation. The distinction here that brings the offence into the realm of criminal sanction is intent – in other words, the person must commit the offence intentionally if it is to be considered criminal - otherwise it can pursued as an offence attracting administrative sanctions.
Article 5 provides that inciting, aiding and abetting either insider dealing or market manipulation will also be criminal offences while attempt of some of the insider dealing and market manipulation offences will, in themselves, be offences too – in other words, to attempt to promote that sort of insider dealing.
Article 6 requires member states to introduce criminal sanctions for each of the offences above that are effective, proportionate and dissuasive as this is the first time the Commission has proposed an approximation of criminal laws in any area of law and as there is such a divergence between member states currently, it has stopped short of stipulating the penalties here. However, article 9 of the draft directive provides that within four years of the directive coming into force, the Commission will review the operation of the sanctions and consider the need to introduce common minimum rules on the types and level of sanctions at that stage. Articles 7 and 8 deal with the liability of corporations and ensure they can also be prosecuted in certain circumstances.
As for the next steps, if the Houses give their approval to these motions, Ireland will participate in the application of this directive once it is adopted. Of course, approval to participate does not mean we will accept all elements of the proposal. While we already have a regime of criminal sanctions here which, to a large extent, is similar to what is being proposed, there are likely to be some features which will need further work from an Irish perspective. For example, the Commission's proposal will extend the coverage to a wider range of markets and products, although, as I mentioned, the full scope is still not certain. To what extent that means we will need to adapt our rules and procedures is not yet clear. These are issues we need to tease out in determining the Irish negotiating position. That will be done over the coming months together with the Minister for Finance and the Minister for Justice and Equality. Clearly, the views of the Central Bank as the competent authority in this area will be important also.
In the meantime, the Government believes it is essential for Ireland to be in at the beginning of this negotiation to work with our EU partners in the design of a modern and effective framework for combating the most serious financial crimes. There is nothing new in saying that financial services have become more and more international in their operations and we, as legislators, need to adapt the laws to meet the challenge. This proposal for a directive has the potential to be an important tool in facing that challenge. I commend the proposed directive to members and recommend that Ireland participation in the adoption and application of it.
The legislation being considered is very worthwhile and it is interesting that it is coming from Europe. One of the areas which needs to be covered is this speculation on food marketing prices and markets that contribute to the food spikes. We have see revolutions happen around the world, such as in Egypt, due to this sort of thing but, in many ways, it also has an effect on us when we go to do our shopping.
Last week, Barclays Bank won a shame award for speculating on food prices. The award was presented at Davos by the World Development Movement, a group which stated that this type of speculation should be made illegal. It was explained very well that what makes it illegal is the intent. In my opinion when people invest, something like that might happen, however, if their intent is to speculate, to cause that outcome, it would have an effect.
The proposed law aims to discover fraudulent activity. I draw members' attention to information technology companies that are able to produce e-discovery. I had not known about e-discovery - the practice of examining electronic records to unearth important data and relationships. There is one notable case in the US that I have as an example, which was reported in The Economist in July 2011, and thanks to similar software, a link was found between several executives at a firm who had been issuing bogus invoices in order to inflate its revenue. If we are to do something similar, there should be a way of being able to use information, in the way that the freedom of information operates. I was impressed by the way the Swedish freedom of information works, where everything is automatically put online. One does not have to apply to get the information. It is available for the public. I do not know whether we should consider that system. I was never enthusiastic about FOI, when the legislation was introduced more than ten years ago. Now, there is a great deal of sense in putting the information we have about what is happening online which would make it much more open to the public. The information would be automatically available, without a person having to request it.
It is important to be clear that speculation in itself is not being outlawed, it is the more precise offences of insider dealing, when people in possession of inside information use that information to acquire or dispose of financial instruments. People can speculate on the value, which would not be illegal, but manipulating information to give themselves an advantage or giving false or misleading signals as to the supply or demand is an offence. The case that Senator Quinn cited of bogus invoices would look to fall into the category of market manipulation. To buy in the hope that the price would rise, would not fall into that category. Clearly whatever form of detection, be it e-enabled or otherwise, would form part of the evidence.
On the issue of freedom of information, my understanding is that FOI covers information in public rather than in private sector bodies and the obligation to disclose commercial transactions would raise legal issues that go considerably beyond what we are discussing here. I know it has been raised in the context of fair trading rules in the grocery area, which the Senator knows more about than I do. The other issue, is that the Government is looking at whistleblower legislation, in the context of having broad based whistleblower legislation that would protect people who disclose information around practices such as these. There is an anticipation of changes.
I call Deputy Crowe.
I would not pretend to know a great deal about this area. The Minister stated in his submission that there are discrepancies across different states, that some states have weaker legislation. What states have weaker legislation? How effective is the current Irish legislation in this area? Is it robust enough?
The Minister mentioned the proposed whistleblower legislation, which is welcome, and it would be helpful if it were in tandem with the proposal that we are discussing today. How significant is it that this proposal suggests criminal sanctions in the European Union? Will it give rise to concerns? I know this proposed directive arises from the Lisbon treaty, but does that mean that directives arising from the treaty will be a regular occurrence? I do not think anyone has major problems with this specific directive on insider trading. I am not aware, and it has not yet hit my radar, that Johnny is up before the court on such offences under our legislation. We have seen instances where people were trying to manipulate the value of bank shares. That is a matter for another forum. I have no doubt but that the motion before us will be passed as the Government has a majority, but I think it raises a number of issues, which I ask the Minister to consider and respond to them this morning.
I am not sure we have the details of the different regimes in other states. I have information on the research done by the Commission but I do not have a name and shame list from it. I know our regime is regarded as one of the more robust. Our sanction regime was established in 2005 and has criminal sanctions up to ten years in prison, a fine up to €10 million and the right of civil action. The biggest case, members would have seen, is DCC v. Fyffes, which ended up with substantial damages being awarded and administrative sanctions under financial regulation. I think our legislation would be deemed as among the effective criminal regimes. It has clear criminal sanctions. Following a review of the directive, four years after it has been adopted, there may be a question as to whether our sanctions are correct or if there is a need for a minimum sanction. I understand we have the right to opt-in in each case. If we do not like the idea that the EU would produce a directive in some area of criminal activity, we have the right to opt out. In this instance we are saying that in the case of market manipulation and insider dealing, we regard it as good for Ireland to be part of an EU wide regime, because such crimes have the potential to have global effect and that there should be a similar regime across the European Union, so that people cannot evade their responsibilities. Let me assure members that this would be coming through the Joint Committee on Justice, Defence and Equality and it is unusual that this issue is before the Joint Committee on Jobs, Social Protection and Education. The principle of subsidiarity would be applied by the EU and it would only be adopting directives with European wide sanctions, where there was a belief that the crime required member wide sanctions. I think there is good protection against creep, undermining the right of Parliament to decide its own affairs.
I do not have a country by country breakdown.
I am seeking clarification regarding the fact that Ireland is paired with the United Kingdom. Does our legislation in this area work in tandem with that in the United Kingdom? Uniformity is needed across the European Union. Will the provisions of the proposal also apply to the financial markets? I am sure legislation on the financial sector differs across the globe, including within the European Union. In recent years, questions have been asked about the lax approach the authorities here have taken towards the banking sector which engaged in widespread reckless behaviour. In the United States bankers faced the law and suffered the consequences whereas no action has yet been taken in this country. How will the proposal impact on financial services?
Admissions of guilt by bankers in the United States were helpful.
The United Kingdom will also be able to opt out. I understand it is the intention of the UK to proceed but we do not yet know because the British Government must seek parliamentary approval for its position in the same way as we are seeking it. However, the UK has indicated it is generally supportive of the proposal and we expect Britain to adopt it.
The proposed directive covers financial markets. As I indicated, the markets in financial instruments directive, MiFID, is extending the range of financial instruments which will be embraced by EU directives. As such, its scope is being broadened. In the case of Ireland, this will mean that areas such as alternative securities markets will come within the scope of the proposed directive. At present, these markets are overseen by the Office of the Director of Corporate Enforcement. They would be brought into the remit of the European Union and the Financial Regulator.
On actions in respect of any particular offences that have occurred, I cannot comment on this matter other than to note that the Office of the Director of Corporate Enforcement has assembled the cases and the investigation is well advanced. It will be for the Director of Public Prosecutions to act on the files that are submitted.
If there are no further questions or comments, I will ask the Minister to conclude.
I thank members for their support. Anyone who considers the anguish and disruption the financial crisis has caused for many ordinary people will realise the importance of tightening rules and regulations. While it may be dusty, difficult and complex to do this type of work, it is important to try to protect people for the longer term.
As we have completed our consideration of the motion, in accordance with Dáil Standing Order 87 and Seanad Standing Order 72, the joint committee will report back to Dáil Éireann and Seanad Éireann to the effect that it has completed its consideration of the motion. I thank the Minister and his officials for attending.